1. The Securities and Exchange Commission recognizes the affirmative responsibility of officers and directors under
federal securities laws to ensure the accuracy and completeness of public company filings with the SEC.
a.
True
b.
False
2. To comply with their duty of loyalty, directors and managers must subordinate their own interests to those of the
corporation.
a.
True
b.
False
True
Easy
20-3 Duty of Loyalty
3. In evaluating a buyout proposal, the directors should consider material nonprice provisions of the proposed agreement.
a.
True
b.
False
True
Moderate
20–5c Nonprice Considerations
4. The Dodd-Frank Wall Street Reform and Consumer Protection Act outlaws corporate executives from holding stock in
companies for which they work.
a.
True
b.
False
False
Moderate
20–8a Say-on-Pay and Shareholder Proposals to Executive Compensation
True
Moderate
20–1b Duty to Exercise Reasonable Supervision
5. The duty of care includes the duty to make informed decisions.
a.
True
b.
False
6. Termination fees are sometimes characterized as liquidated damages.
a.
True
b.
False
True
Moderate
20–5f Deal Protection Devices
7. A person must own a majority of shares in a corporation in order to be considered a controlling shareholder.
a.
True
b.
False
False
Moderate
20-9 Duties of Controlling Shareholders
8. In CASE 20.2 In Re Rural Metro Corporation Shareholders Litigation (2014), the Delaware Chancery court considered
whether an investment banker could be held liable as an aider and abettor of a breach of fiduciary duty by the board of
directors.
a.
True
b.
False
True
Moderate
9. In certain cases, the duty of good faith may be subsumed within the duty of loyalty.
a.
True
b.
False
10. Under no circumstances do controlling shareholders owe fiduciary duties to other shareholders.
a.
True
b.
False
False
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-9 Duties of Controlling Shareholders
Blooms: Comprehension
11. In 2013, the SEC proposed an amendment to the Dodd-Frank Act, which requires disclosure of the pay ratio of the
median of the annual total compensation of all employees to the annual total compensation of the CEO.
a.
True
b.
False
12. A poison pill is a defensive measure that would make any takeover not approved by the directors prohibitively
expensive.
a.
True
b.
False
True
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–6a Poison Pills
Blooms: Comprehension
13. In order to take advantage of the business judgment rule, directors must have made an informed decision and have no
conflict of the interest with the corporation.
True
Moderate
DISC: – AICPA: BB-Legal
20-2 Duty of Good Faith
Blooms: Comprehension
a.
True
b.
False
14. A shareholder derivative action is a suit brought by a shareholder on behalf of the corporation.
a.
True
b.
False
True
Moderate
20–1b Duty to Exercise Reasonable Supervision
15. A controlling shareholder has a duty not to transfer the power of management to a purchaser that he knows or has
reason to believe will use that power to the detriment of the corporation.
a.
True
b.
False
True
Moderate
20-9 Duties of Controlling Shareholders
16. Companies listed on the New York Stock Exchange must have compensation committees composed entirely of
independent directors.
a.
True
b.
False
True
Moderate
17. The Delaware Corporation Code allows the certificate of incorporation to include a provision limiting or eliminating
True
Moderate
20-1 The Business Judgment Rule and the Duty of Care
the personal liability of directors to the corporation or to its shareholders for monetary damages for breach of the duty of
loyalty.
a.
True
b.
False
18. Breakup fees are liquidated damages for a terminated proxy fight.
a.
True
b.
False
False
Moderate
20–5f Deal Protection Devices
19. The Delaware Supreme Court has held that, regardless of the circumstances, a majority shareholder may never freeze
out the minority shareholders.
a.
True
b.
False
False
Moderate
20–9b Freeze-Outs
20. Controlling shareholders, but not officers or directors, of a corporation may use the corporation‘s confidential
information for personal gain.
a.
True
b.
False
False
Moderate
20-9 Duties of Controlling Shareholders
False
Challenging
20–1d Statutory Limitations on Directors’ Liability for Breach of Duty of Care
21. The business judgment rule is applicable only if the directors make an informed decision.
a.
True
b.
False
22. In the context of takeovers, board members cannot reject an offer without taking sufficient time to analyze its merit.
a.
True
b.
False
True
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-5 Duties in the Context of Mergers, Acquisitions, and Takeovers
Blooms: Comprehension
23. What is required by the Sarbanes-Oxley Act of 2002 in regard to the certification of the accuracy of public companies’
SEC filings and the adequacy of internal controls?
a.
The chief executive officer, the chief financial officer, and all inside directors must certify the accuracy of
public companies’ SEC filings and the adequacy of internal controls.
b.
The chief executive officer, the chief financial officer, and any controlling shareholder must certify the
accuracy of public companies’ SEC filings and the adequacy of internal controls.
c.
The chief executive officer and the chief financial officer must certify the accuracy of public companies’ SEC
filings and the adequacy of internal controls.
d.
The chief executive officer, the chief financial officer, and all outside directors must certify the accuracy of
public companies’ SEC filings and the adequacy of internal controls.
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–1b Duty to Exercise Reasonable Supervision
Blooms: Comprehension
24. In CASE 20.1 Smith v. Van Gorkom (1985) discussed in the text, plaintiff-shareholders alleged the directors were
grossly negligent in failing to inform themselves adequately before making a decision about a merger. How did the court
rule and why?
a.
For plaintiff-shareholders, because the board failed to obtain adequate information on merger terms and
therefore was not protected by the business judgment rule.
b.
For directors, because the board was protected by the business judgment rule since there was no conflict of
interest.
c.
For the directors, but the board was not protected by the business judgment rule but rather by the business
True
Moderate
DISC: – AICPA: BB-Legal
20-1 The Business Judgment Rule and the Duty of Care
Blooms: Comprehension
merger rule.
d.
For the directors, because the board was protected by the business judgment rule since fraud could not be
established.
25. The Smith v. Van Gorkam decision underscores which of the following regarding statements of officers or directors?
a.
An outside director, but not an inside director, may in good faith rely upon any statement of an executive
officer.
b.
An inside director, but not an outside director, may in good faith rely upon any statement of an executive
officer.
c.
Any director may in good faith rely upon any statement of an exeecutive officer.
d.
Not every statement of an executive officer can be relied upon in good faith.
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–1a Informed Decision
Blooms: Comprehension
26. Which of the following is considered an inside director of a corporation?
a.
A director who is also an officer of the corporation.
b.
A director who is also an officer of any corporation.
c.
A director who is both an officer of any corporation and who stands to personally profit by an action being
considered by the board.
d.
A director who is qualified as an expert in regard to any product of the company.
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-1cDisinterested Decision
Blooms: Comprehension
27. Which of the following is true in regard to the business judgment rule if one or more individual directors have a
personal interest in a transaction being considered by the board?
a.
The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a
majority of the inside directors.
b.
The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a
majority of the disinterested directors.
c.
The decision is not entitled to the protection of the business judgment rule resulting in a higher level of proof
a
Challenging
DISC: – AICPA: BB-Legal
20-1 Business Judgment Rule and Duty of Care
Blooms: Analysis
regarding the reasonableness of the transaction being required from the board of directors.
d.
The decision is not entitled to the protection of the business judgment rule leading to a legally established
conclusion of illegality on the part of the board of directors.
28. Some jurisdictions permit the shareholders to amend the articles of incorporation to relieve directors of any financial
liability for violations of the duty of:
a.
care.
b.
loyalty.
c.
avoiding self dealing.
d.
voting.
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–1d Statutory Limitations on Directors’ Liability for Breach of Duty of Care
Blooms: application
29. The Omnicare, Inc. v. NCS Healthcare, Inc. case discussed in the text, involved a question of whether directors of an
insolvent publicly traded company violated their fiduciary duty when they entered into an agreement for the sale of the
company to a particular interested buyer regardless of other offers. The court ruled that:
a.
the directors violated their fiduciary duty and lacked the authority to agree to an absolute lock-up guaranteeing
the sale and agreeing to forgo consideration of future offers.
b.
the directors violated their fiduciary duty because the agreement was kept secret from majority shareholders
but that, otherwise, the agreement foregoing consideration of future offers would have been valid.
c.
the directors violated their fiduciary duty because the agreement was kept secret from minority shareholders
but that, otherwise, the agreement foregoing consideration of future offers would have been valid.
d.
the directors satisfied all fiduciary duties because there was no evidence of bad faith or self dealing.
a
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–5f Deal Protection Devices
Blooms: Analysis
30. In the Air Products & Chemicals, Inc. v. Airgas, Inc. case discussed in the text, defendant’s board of directors
allegedly breached its fiduciary duties to stockholders by refusing to redeem a poison pill in place and allow a hostile
takeover to proceed. The court ruled that:
a.
the board satisfied its fiduciary duties because as a matter of law directors may use poison pills to block hostile
takeovers that would result in a change of management.
Moderate
DISC: – AICPA: BB-Legal
20-1 Business Judgment Rule and the Duty of Care
Blooms: Comprehension
b.
the board satisfied its fiduciary duties because the members acted reasonably in response to the belief, based
on reasonable grounds, that the hostile takeover offer was inadequate and posed a legitimate threat if accepted.
c.
the board failed to act reasonably because the members acted in their own self interest, not in the best interests
of the shareholders, and that the board failed to properly seek expert opinion regarding the hostile takeover
offer in relation to the value of the company.
d.
the board failed to act reasonably because as a matter of law it could not leave the poison pill in place in the
face of a hostile takeover bid.
31. A shareholder derivative suit is a lawsuit by:
a.
shareholders on behalf of the corporation.
b.
the shareholders directly.
c.
the controlling shareholders on behalf of the majority shareholder.
d.
the corporation.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–1b Duty to Exercise Reasonable Supervision
Blooms: Comprehension
32. In the Carmody v. Toll Bros., Inc. case discussed in the text, the Delaware Court of Chancery analyzed the question of
the legality of a dead-hand pill under Delaware law. In striking down the dead-hand pill, the court ruled that:
a.
the directors appropriately used the dead-hand pill which guaranteed that majority shareholders in place before
a hostile bidding attempt were entitled to vote to block any later proposed vote on a merger.
b.
the directors appropriately used the dead-hand pill because directors are entitled to use any means necessary in
order to block a hostile takeover.
c.
the dead-hand pill violated the state general corporation law for a number of reasons including that it violated
the directors’ duty of loyalty.
d.
the dead-hand pill, which could only be redeemed by directors in office after a hostile bidder gained control or
by their designated successors, violated the state general corporation law because it prejudiced directors in
place prior to the takeover.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–6a Poison Pills
Blooms: Analysis
33. Which of the following was the result in the Quickturn Design Sys., Inc. v. Shapiro case, which involved a Delaware
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–6a Poison Pills
Blooms: Analysis
court’s ruling on the “no-hand pill”?
a.
As a matter of law the pill was valid as a response to a takeover bid regardless of whether independent proof
existed that the directors acted reasonably.
b.
The pill was valid because the directors established, based upon reliable expert testimony, that the hostile
takeover bid presented a dangerous threat to the continuation of the company.
c.
The pill, which had to be redeemed within one month of a takeover bid or else be allowed to remain in place,
was invalid because it impermissibly circumscribed the board’s statutory power to manage the business affairs
of the company and the directors’ ability to fulfill their fiduciary duties.
d.
The pill, which could not be redeemed for six months following a takeover, was invalid because it
impermissibly circumscribed the board’s statutory power to manage the business affairs of the company and
the directors’ ability to fulfill their fiduciary duties.
34. Which of the following are among the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act
in relation to shareholder control of pay for top executives?
a.
The act provides that shareholders of all privately held as well as publicly traded companies are entitled to
vote and set executive compensation on a yearly basis.
b.
The act provides that shareholders of public companies have an advisory vote on company payment practices
for top executives and that public companies must hold a shareholder advisory vote on golden parachutes for
executives.
c.
The act provides that shareholders of all privately held as well as publicly traded companies are entitled to
vote and set executive compensation on a yearly basis and also that the shareholders must specifically approve
any golden parachute provisions for executives.
d.
Based on the belief that ill informed shareholder input negatively affected nationwide corporate performance
the act provides that shareholders need not be involved in setting executive compensation.
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–8a Say-on-Pay and Shareholder Proposals Related to Executive Compensation
Blooms: Comprehension
35. A(n) __________ gives the person to whom it is granted the right to buy a certain number of shares at a fixed price for
a fixed number of years during a period known as the __________ period which is not usually for more than __________.
a.
call right; exercise; twelve months
b.
option; redemption; twelve months
c.
option; redemption; ten years
d.
option; exercise; ten years
Moderate
United States – BUSBROG: – Analytic
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–6a Poison Pills
Blooms: Analysis
36. The __________ requires that officers and directors not take personal advantage of a desirable business investment
that rightfully belongs to the corporation.
a.
right of first refusal
b.
corporate opportunity doctrine
c.
line of business test
d.
expectancy test
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–3a Corporate Opportunities
Blooms: Comprehension
37. Which of the following is true regarding state rules of corporate governance?
a.
Under the U.S. Constitution, a state may only apply its corporate governance rules to corporations
incorporated in the state.
b.
California imposes state pro-shareholder rules on quasi-foreign corporations.
c.
There are no state rules of corporate governance because the Securities and Exchange Commission has
preempted the field.
d.
By federal law, if a state wishes to impose corporate governance requirements on corporations incorporated in
the state, then the same rules must be imposed on corporations operating in the state but incorporated in
another state.
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–1d Statutory Limitations on Directors’ Liability for Breach of Duty of Care
Blooms: Comprehension
38. In the context of executive compensation, __________ stock usually means stock subject to vesting restrictions.
a.
regulated
b.
restricted
c.
illegally issued
d.
kickback
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–8b Equity Compensation
Blooms: Comprehension
DISC: – AICPA: BB-Legal
20–8b Equity Compensation
Blooms: Application