489
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
A1. Shareholders are the ultimate authority in every corporation.
A2. Many qualifications are required for directors.
A3. An amendment to the articles of incorporation can create a new position on the board
of directors.
490 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A4. An inside director is a director who does not hold a management position in the
corporation.
A5. Directors have a right to participate in all board of directors’ meetings.
A6. Committees of the board of directors focus on individual subjects.
A7. Officers hire the directors and other executive employees.
A8. The ordinary rules of agency normally do not apply to the employment of corporate
officers.
A9. A director or officer is required to exercise the care that an ordinarily prudent person
would exercise in similar circumstances.
A10. Directors are entitled to use corporate funds for their personal advantage.
A11. Directors are not obligated to refrain from self-dealing.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 491
A12. A director must make a full disclosure of any potential conflict of interest that might
arise in any corporate transaction.
A13. Shareholders are co-owners of the corporation.
A14. Shareholders’ meetings need not occur at any certain interval.
A15. In some states, obtaining the unanimous written consent of shareholders is a
permissible alternative to holding a shareholders’ meeting.
A16. Dividends are distributed on the basis of possession of a stock certificate.
A17. Dividends can be paid in the stock of the corporation that is paying the dividends.
A18. Every shareholder is entitled to examine specified corporate records.
A19. When a third party harms a corporation, only the shareholders can bring a suit in the
corporation’s name against that party.
492 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A20. Shareholders are personally liable for the debts of a corporation.
MULTIPLE CHOICE QUESTIONS
A1. Gillian is a director of Fizzy Soda Company. As a director, Gillian can act as an agent to
bind Fizzy
a. in all circumstances.
b. in no circumstances.
c. to any contract in which Fizzy does not have a conflict of interest.
d. to any contract that represents a corporate opportunity for Gillian.
A2. 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.
A3. Lon and Merry act as the incorporators for NuGame Corporation. After the first board
of directors is chosen, subsequent directors are elected by a majority vote of
NuGame’s
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
A4. Bret and Courtney form Delite Day Care, Inc. Ultimate responsibility for policy
decisions necessary to the management of corporate affairs rests with Delite’s
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 493
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
A5. Frida, Gayla, and Hart occupy the positions of director on the board of Integral
Components Corporation. With respect to these directors, a quorum is the minimum
number
a. who must be at odds in a dispute to call for its resolution.
b. who must be present to validly transact business.
c. whom the shareholders may remove from office at any one time.
d. whose positions must be vacant to warrant an election.
A6. Reba is a director of Quantum Mechanix Corporation. Reba’s rights, as a director, do
not include a right to
a. indemnification.
b. inspection.
c. participation.
d. self-dealing.
A7. Melba and Leon are directors of Fresh Foods, Inc. The right of Melba and Leon to be
notified of special meetings of the board is the right to
a. compensation.
b. indemnification.
c. participation.
d. self-dealing.
494 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A8. 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.
A9. VeriVisual Company makes HD 3D film and video equipment. VeriVisual is like most
corporations in that its officers are hired by the firm’s
a. board of directors.
b. incorporators.
c. other officers.
d. shareholders.
A10. 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.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 495
A11. Luke is a director of Motor Parts Corporation. Luke makes decisions with respect to
Motor Parts in good faith, in what Luke believes is the firm’s best interest, and
without violating any duties owed to it. If, despite these circumstances, Luke exercises
poor business judgment, under the business judgment rule Luke is
a. immune from liability.
b. liable only to the extent that Luke gains as a result.
c. liable only to the extent that Motor Parts suffers as a result.
d. wholly liable.
A12. Gladys is a shareholder of Frozen Yogurt, Inc. As a shareholder, Gladys must approve
a. amending the bylaws.
b. declaring a corporate dividend.
c. hiring a chief executive officer.
d. issuing additional shares.
A13. Heidi and Ian are directors and shareholders of Globe Software, Inc. Heidi’s written
authorization to Ian to vote Heidi’s shares at a Globe shareholders’ meeting is
a. a violation of the duty of loyalty.
b. a preemptive right.
c. a proxy.
d. a quorum.
496 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A14. Thor Power Products Corporation permits the election of its directors 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. insures against persons who may “cloud” the corporate direction.
A15. Fiona owns one share of stock in GR8 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.
A16. In all states, Exercise & Fitness Club Company and other corporations can pay
dividends from
a. gross profits.
b. net profits.
c. retained earnings.
d. surplus.
A17. Bev is a shareholder of All-Terrain Vehicle Company. As a shareholder, Bev does not
have
a. a right to compensation.
b. dividend rights.
c. inspection rights.
d. preemptive rights.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 497
Fact Pattern 40–1A (Questions A18–A19 apply)
Ruben is a shareholder of Speed Bikes Company (SBC). When the directors fail to undertake
an action to redress a wrong suffered by SBC, Ruben files a suit on the firm’s behalf.
A18. Refer to Fact Pattern 40-1A. Ruben’s suit is a shareholder’s
a. indemnification suit.
b. derivative suit.
c. proxy suit.
d. preemptive suit.
A19. Refer to Fact Pattern 40-1A. Any damages recovered by Ruben’s suit will normally go
to
a. Ruben.
b. SBC.
c. SBC’s directors.
d. the state in which SBC is incorporated.
A20. Clark is a shareholder of Bedrest Mattress Company. Clark will be deemed to have a
fiduciary duty to Bedrest and its minority shareholders if he has
a. preferred stock.
b. a right of first refusal.
c. a sufficient number of shares to exercise de facto control.
d. watered stock.
ESSAY QUESTIONS
A1. Tank is a director and the majority shareholder of Unique New Investment
Corporation (UNIC). Tank buys, for $1,500, an option to purchase a tract of real estate
for $50,000. Tank forms Vista Property, Inc., to hold the option. As the majority
shareholder, and thus controlling director, of UNIC, Tank orders the firm to authorize
the purchase of the land from Vista Property for $500,000. Tank then has Vista
498 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
Property buy the land, sell it to UNIC, and loan the money to UNIC for the purchase at
a 10 percent interest rate. Wim, a minority shareholder in UNIC, complains to UNIC’s
board, which takes no action. Wim files a suit against Tank on UNIC’s behalf. Will Wim
prevail? Explain.
A2. Dimitri is a director and shareholder of Equitable Corporation and of Four Square
Products, Inc. A resolution comes before the Equitable board to compete with Four
Square. What is Dimitri’s responsibility?