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Chapter 19
Corporations
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. One of the key advantages of the corporate form is the unlimited liability of its
owners.
2. The state can suspend the entity’s corporate status until the taxes are paid or
even dissolve the corporation for failing to pay taxes.
3. A foreign corporation normally does not need a certificate of authority to sell
goods or services via the Internet or by mail.
4. A publicly held corporation is any corporation whose shares are publicly traded
in a securities market.
5. If a corporation has S corporation status, it can avoid the imposition of income
taxes at the corporate level.
6. The articles of incorporation serve as a primary source of authority for the
corporation’s future organization and business functions.
7. The registered agent is the person who can receive legal punishment (such as
fines and imprisonment) on behalf of the corporation.
8. There are no important consequences if the procedures for incorporation are
not followed precisely.
9. In the absence of express constitutional, statutory, or other provisions, the
corporation has no implied powers.
10. In corporate law, acts of a corporation that are beyond its express or implied
powers are de facto or de jure acts.
11. Most states do not permit the corporate articles or bylaws to authorize
compensation for directors.
CHAPTER 19: CORPORATIONS 3
12. A director who does not hold a management position in the corporation is an
outside director.
13. Each director present at a meeting of the board of directors has one vote for
each outstanding share of corporate stock that he or she holds.
14. In most states, an individual cannot hold more than one corporate office and be
both an officer and a director of the corporation.
15. Directors are prevented from ever having financial dealings with the
corporations they serve.
16. Shareholders own the corporation, and they have legal title to corporate
property.
17. Shareholders have the power to vote to elect or remove members of the board
of directors.
18. A straight majority vote of the shares represented at a shareholders’ meeting is
usually required to pass resolutions.
19. Dividends can be paid from the undistributed net profits earned by the
corporation.
20. Restrictions on the transfer of shares in a close corporation are usually void.
MULTIPLE CHOICE QUESTIONS
1. Demario and Evander want to form and do business as a corporation—Farm-2-
Fork Restaurant Inc. A corporation is
a. a natural being.
b. a tangible thing.
c. an artificial person.
d. ultra vires.
3. The shares of Home Mortgage Corporation are publicly traded in securities
markets. Home Mortgage Corporation is
a. a close corporation.
b. a privately held corporation.
c. a public corporation.
d. a publicly held corporation.
2. Dollars & Sense, Inc., is incorporated in the state of New Jersey and is doing
business in the state of New York. In New York, Dollars & Sense is properly
referred to as
a. a domestic corporation.
b. a foreign corporation.
c. an alien corporation.
d. a public corporation.
CHAPTER 19: CORPORATIONS 5
4. Orel incorporates his business as Posts & Wire Corporation in Texas. He and
his group of shareholders intend to make a profit from their sales of fencing
materials. Posts & Wire is
a. a nonprofit corporation.
b. not a corporation.
c. an alien corporation.
d. a private corporation.
5. Boutique Bodega Corporation would like to change its corporate status to that
of an S corporation to avoid income taxes at the corporate level. To qualify, the
shareholders must not be
a. corporations.
b. estates.
c. individuals.
d. partnerships.
6. Tech Personnel, Inc., is a corporation. Tech Personnel’s implied powers enable
it to
a. none of the choices.
b. depart significantly from traditional corporate formalities.
c. bind the corporation to an action that will greatly affect its purpose.
d. borrow funds and lend funds.
7. Memphis Music Makers Inc.’s stated purpose is to sell musical instruments. If
chief executive officer Neal contracts with Open Season Firearms in Memphis
Music’s name to sell a shotgun, he has likely committed
a. an ultra vires act.
b. a de facto act.
c. a de jure act.
d. a legal act.
8. Godwin is a director on the board of Health Insurance Corporation. On the
receipt of notice of a board meeting, Godwin attends the meeting and takes
part in the discussion of business matters and votes on corporate issues.
Godwin is entitled to be notified of, and to take part in, these meetings
a. under the director’s right to participation.
b. under the director’s right to compensation.
c. under the director’s right to indemnification.
d. only on his own initiative.
9. 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. initial board of directors.
b. incorporators.
c. first officers.
d. preferred shareholders.
10. Alain is chairman of the board of Barber & Beauty Supply Corporation.
Consuela, a consumer, is injured while using a Barber & Beauty product. She
sues Barber & Beauty and Alain individually. The corporation may pay Alain’s
legal fees under
a. under the director’s right to participation.
b. under the director’s right to compensation.
c. under the director’s right to indemnification.
d. only on the firm’s own initiative.
11. Renee is a director of Sharp Focus Lens Corporation. With respect to Sharp
Focus, Renee can access the corporation’s books and records. Renee has this
access under
a. the director’s right to participation.
b. the director’s right of inspection.
c. the director’s right to indemnification.
d. the articles of incorporation or corporate bylaws.
12. Lewis is a director of Mines & Refineries, Inc. Using information that is not
available to the public, Lewis makes a profit trading in Mines & Refineries
stock. Lewis is most likely liable for breach of
a. no duty or rule
b. the business judgment rule.
c. the duty of loyalty.
d. the duty of care.
13. Eloise is a director for Frozen Yogurt Company. Eloise is also a director for
Gelato Desserts, Inc. When the board of Frozen Yogurt considers entering into
a contract with Gelato Desserts, Eloise must
a. resign from one of the boards.
b. resign from both boards.
c. make a full disclosure of any conflict of interest.
d. use her best business judgment in voting on the proposed deal.
14. Farrah and Grant are shareholders of Hong Kong Restaurants, Inc. As
shareholders, they must approve
a. conducting a merger.
b. deciding to pursue new business opportunities.
c. none of the choices.
d. negotiating a contract between management and labor.
15. Misha and Nguyen are shareholders of Outsourcing Solutions, Inc. Misha’s
written authorization to Nguyen to vote her shares at a shareholders’ meeting is
a. a violation of the duty of loyalty.
b. a preemptive right.
c. a proxy.
d. a quorum.
16. Mieko is a shareholder of Natural Gas, Inc. Natural Gas uses cumulative voting
to elect directors. This means that the number of Mieko’s votes is determined
by the number of
a. years that Mieko has been a shareholder.
b. members of the board to be elected multiplied by the total number of
voting shares that Mieko holds.
c. shareholders present at the shareholders’ meeting.
d. shareholders’ meetings that Mieko has attended.
17. Reed owns one share of stock in SK8 Boards Corporation, as evidenced by a
stock certificate. Reed loses the certificate. Reed’s 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.
18. Lovey is a shareholder of Made-2-Order Manufacturing 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 Made-2-Order 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.
19. 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.
20. Orsa is a shareholder in Pickles & Preserves Corporation. In some states, Orsa
may be liable to the firm’s creditors for unpaid corporate debts if she
a. accepts a dividend knowing that it was paid from retained earnings.
b. receives shares issued by the firm for less than fair-market value.
c. fails to fulfill her fiduciary duty to the majority shareholders.
d. sells her shares.
ESSAY QUESTIONS
1. Dennis is a promoter for the soon-to-be-incorporated firm of eBroadcast Sports,
Inc. Dennis signs a contract with Fitz & Geraldo, Accountants, to render their
services before eBroadcast Sports is incorporated and for one year after the in-
corporation. eBroadcast Sports is incorporated. Three months later, after Fitz &
Geraldo has continued performing under the contract, the eBroadcast Sports
board of directors tells the accountants that it is canceling their contract. Fitz &
CHAPTER 19: CORPORATIONS 11
Geraldo files a suit against Dennis and eBroadcast Sports, alleging breach of
contract. Will Fitz & Geraldo prevail?
2. Nelson is Organic Coffee Company’s majority shareholder. Nelson decides to
sell his Organic Coffee stock. The sale will be an effective transfer of the
control of the company. Does Nelson owe a duty to Organic Coffee or its
minority shareholders in this situation?
