Chapter 40
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
B1. Many states permit a corporate board to have fewer than three directors.
B2. In most states, a director cannot be removed without cause unless shareholders have
reserved the right.
B3. Corporate directors are rarely compensated for their work, effort, and especially the
risk involved.
B4. An outside director is a director who is also an officer of the corporation.
B5. Each director has a right of access to the corporation’s books and records, facilities,
and premises.
ANSWER: T PAGE: 777 TYPE: N
NAT: AACSB Analytic AICPA Legal
B6. Committees of the board of directors increase the efficiency of the board.
B7. In most states, one individual cannot be both an officer and a director.
B8. The board of directors normally can remove a corporate officer at any time with or
without cause.
B9. A director or officer is not liable to the corporation for a bad business decision.
B10. Directors are entitled to use confidential corporate information for their personal
advantage.
B11. Directors and officers must subordinate the welfare of the corporation to their
personal interests.
B12. A director does not need to disclose any conflict of interest before voting on a
proposed transaction.
B13. Shareholders must approve fundamental changes affecting the corporation before the
changes can be implemented.
B14. Shareholders must attend a shareholders’ meeting to vote their shares.
B15. For shareholders to act during a meeting, a quorum must be present.
B16. If a stock certificate is lost or destroyed, ownership is not destroyed with it.
B17. Dividends can be paid in cash.
B18. Before shareholders can bring a derivative suit, they must submit a written demand to
the corporation, asking the board of directors to take action.
B19. A shareholder’s right to inspect corporate books and records is unlimited.
B20. In certain instances of fraud, a court may “pierce the corporate veil” to hold the
shareholders individually liable.
MULTIPLE CHOICE QUESTIONS
B1. Sophie and Tiny incorporate their beverage-container business as U-Twist Products,
Inc. The first board of directors may be appointed by the firm’s
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
B2. Whit is a director of Vids Corporation. With respect to policymaking decisions
necessary to the management of corporate affairs, Whit and the other Vids directors
have responsibility for
a. all of the decisions.
b. only the decisions referred to them by the shareholders.
c. only the decisions referred to them by the officers.
d. none of the decisions.
B3. Bret and Courtney form Delite Day Care, Inc. Ultimate responsibility for policy
decisions necessary to the management of corporate affairs rests with Delite’s
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
B4. Flite-Craft Corporation makes and sells aircraft parts. In most states, the minimum
number of directors that must be present before Flite–Craft’s board could transact its
business is
a. all of the directors authorized in the articles or bylaws.
b. a majority of the number authorized in the articles or bylaws.
c. any odd number.
d. one.
B5. Raul is chairman of the board of Swif-Vac Corporation. Pinky, a consumer, is injured
while using a Swif-Vac product. Pinky sues Swif-Vac, and Raul individually. Swif-Vac
may pay Raul’s legal fees under
a. the director’s right to certification.
b. the director’s right to compensation.
c. the director’s right to indemnification.
d. no circumstances.
B6. Viola is a director of Water Pure Corporation. With respect to Water Pure, Viola’s
most important right is the right of
a. compensation.
b. indemnification.
c. participation.
d. certification.
B7. Cara and Dru are officers of EZ Trucking Corporation. As corporate officers, the rights
of Cara and Dru are
a. determined by their employment contracts.
b. specified in state corporation statutes.
c. the same as those of the directors.
d. the same as those of the shareholders.
B8. Rocco is a director of Spa Lids & Tubs, Inc. Under the standard of due care owed by di-
rectors of a corporation, Rocco’s decisions must be
a. unwavering and unquestionable.
b. arguable and defensible.
c. informed and reasonable.
d. perfect and unassailable.
B9. Sylvia is an officer of Triad Hotel Company. As an officer, with respect to the
corporation, Sylvia is
a. a fiduciary.
b. a forum.
c. a proxy.
d. a quorum.
B10. Ogilvie, a director of Pitstop Service Station Corporation, does not attend a board
meeting for three years. During that time, Noreen, Pitstop’s president, makes
improper loans that cost the company $100,000. Ogilvie 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.
B11. Genna is a director of Fab Stuff Corporation. Without informing Fab, Genna starts up
Evertrendy, Inc., to compete with Fab. Genna is liable for breach of
a. no duty or rule
b. the business judgment rule.
c. the duty of loyalty.
d. the right of participation.
B12. 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. support businesses that directly compete with Gallery.
B13. Naomi and Ogden are shareholders of MediCare Residences, Inc. As shareholders,
they must approve
a. conducting a merger.
b. deciding to pursue new business opportunities.
c. terminating a managerial employee.
d. negotiating a contract between management and labor.
B14. Niche Stores, Inc., must hold a shareholders’ meeting
a. monthly.
b. annually.
c. biannually.
d. only when it is called by the board of directors.
B15. Zero Sum Games Corporation has forty-three shareholders. The minimum number
that must be present at a meeting for a shareholders’ vote is
a. all of the shareholders.
b. a quorum.
c. a proxy.
d. three of the shareholders.
B16. Odell, Prince, and Quinn are shareholders of Rite Corporation. Before a shareholders’
meeting, they agree in writing to vote their shares together in a certain manner.
Usually, such agreements are held to be
a. invalid and unenforceable.
b. oppressive and irresponsible.
c. suspect and voidable.
d. valid and enforceable.
B17. Roth and Starr are shareholders of Triumph Hotel Corporation. Triumph’s directors fail
to declare a dividend. Roth and Starr could succeed in asking a court to order the
directors to meet and declare a dividend
a. if Triumph has sufficient earnings available to pay a dividend.
b. if Triumph has cash reserves earmarked for a different purpose.
c. if withholding a dividend is an abuse of the directors’ discretion.
d. under no circumstances.
B18. 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.
B19. Darla is a shareholder of Candy Confection Corporation. The right to inspect corporate
books and records is
a. held by Darla only if she is a director.
b. held by Darla, without restrictions.
c. held by Darla, with some restrictions.
d. not held by Darla.
B20. Orin is a shareholder of Pinkwater Corporation. In some states, Orin might incur
personal liability for Pinkwater obligations if he
a. accepts a dividend knowing that it was paid from retained earnings.
b. buys stock for less than its fair-market value.
c. fails to fulfill his fiduciary duty to the majority shareholders.
d. sells his shares.
ESSAY QUESTIONS
B1. 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, a resolution comes before
the Numero Uno board 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?
B2. 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?
