39. Which of the following is true regarding any duties of controlling shareholders in relation to control of a corporation?
a.
Controlling shareholders owe no duties other than to maximize their own wealth.
b.
Controlling shareholders generally have a duty to control the corporation in a fair, just, and equitable manner,
known as the standard of entire fairness.
c.
Controlling shareholders may act to maximize their own wealth only so long as they do not intentionally harm
and exhibit bad faith toward minority shareholders, a standard known as minority shareholder respect and fair
dealing.
d.
Controlling shareholders must appoint minority shareholders to vote a certain percentage of their shares in
instances in which the minority shareholders demand that right.
40. Which of the following is true regarding hostile takeovers in the European Union?
a.
All member states must observe the neutrality rule and the breakthrough rule.
b.
Member states may opt out of the neutrality rule and the breakthrough rule.
c.
Member states may opt out of the neutrality rule, but all member states must observe the breakthrough rule.
d.
Member states may opt out of the breakthrough rule, but all member states must observe the neutrality rule.
United States – AACSB: Diversity
DISC: – AICPA: BB-Legal
Global View: Hostile Takeovers in the European Union
Blooms: Knowledge
41. Which of the following is NOT a prime consideration in determining whether a fiduciary has taken an opportunity that
belongs to a corporation?
a.
Whether the opportunity is in the corporation’s line of business.
b.
The amount of money the fiduciary stands to make.
c.
Whether the fiduciary developed the idea using corporation resources.
d.
Whether the involvement by the fiduciary will hinder the corporation’s purposes.
42. In CASE 20.4 In re Abbott Laboratories Derivative Shareholders Litigation (2003), the shareholder-plaintiffs alleged
the corporate directors breached their duty of good faith through their failure to follow up on repeated notices of
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-9 Duties of Controlling Shareholders
Blooms: Comprehension
regulatory noncompliance. How did the court rule?
a.
The court ruled the directors were not liable and did not breach any duty of good faith because they were
unaware of the issues, and accepted corporate governance procedures did not require the disclosure of the
noncompliance notices to them.
b.
The court ruled the directors could not be held liable because the corporation’s certificate of incorporation
exempted directors from liability for breach of the duty of care.
c.
The court ruled the business judgment rule applied and that the plaintiffs’ allegations could not withstand the
protection of that rule.
d.
The court ruled the plaintiffs sufficiently pleaded allegations that, if true, constituted a breach of the duty of
good faith leading to the directors’ actions falling outside the protection of the business judgment rule.
43. Which of the following is true regarding breakup fees?
a.
They are sometimes characterized as liquidated damages.
b.
The Securities and Exchange Commission prohibits the payment of breakup fees.
c.
Breakup fees are typically 20 to 25 percent of the value of the deal.
d.
They are sometimes characterized as liquidated damages, and breakup fees are typically 20 to 25 percent of
the value of the deal.
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–5f Deal Protection Division
Blooms: Comprehension
44. __________ occurs when a raider acquires stock in a target company and then threatens to comhence a hostile
takeover unless the stock is repurchased by the target at a premium over the market price.
a.
Revlon mode
b.
The Van Gorkom test
c.
The Unocal Proportionality test
d.
Greenmail
Moderate
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
20–5d Nonprice Considerations
Blooms: Comprehension
45. What is a no-shop agreement?
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-2 Duty of Good Faith
Blooms: Analysis
a.
An agreement whereby shareholders agree to not replace directors for a certain period of time.
b.
An agreement whereby directors agree to not replace officers for a certain period of time.
c.
An agreement whereby a target company agrees with a potential purchaser not to actively solicit other bidders
but retains the right to negotiate with parties who submit unsolicited bids to the target.
d.
An agreement whereby shareholders agree to not replace directors or officers for a certain period of time.
46. In CASE 20.5 Third Point LLC v. Ruprecht (2014), the Delaware Court of Chancery considered whether the
__________ had breached its __________ duty when it adopted a(n) __________ stock rights plan in response to an
activist hedge-fund’s increased holdings in the company’s stock.
a.
board of directors, fiduciary, two-tiered
b.
CEO, fiduciary, poison-pill
c.
board of directors, loyalty, poison-pill
d.
board of directors, fiduciary, poison-pill
a
Challenging
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
20–6a Poison Pills
Blooms: Analysis
47. Traditionally, a transaction benefiting a director’s self interest is __________ unless the director could show it was fair
and reasonable to the corporation.
a.
void
b.
voidable
c.
illegal
d.
All of these are correct.
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-3 Duty of Loyalty
Blooms: Comprehension
48. In a __________, someone wishing to replace the board with his or her own candidates attempts to acquire a sufficient
number of shareholder votes to do so through limited written powers of attorney entitling the holder to vote the shares
owned by the person giving the power of attorney.
a.
hostile takeover
b.
proxy contest
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–5f Deal Protection Devices
Blooms: Knowledge
c.
poison pill
d.
greenmail takeover
49. A shareholder who owns sufficient shares to outvote the other shareholders, or to otherwise set corporate policy, and
thus to control the corporation is known as a(n) __________ shareholder.
a.
controlling
b.
absolute
c.
manipulative
d.
chargeable
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20-9 Duties of Controlling Shareholders
Blooms: Comprehension
50. A contractual provision insisted upon by a bidder limiting the ability of board members to negotiate with other bidders
is referred to as a(n) __________ clause.
a.
obedience
b.
loyalty
c.
negotiation
d.
no-talk
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–5f Deal Protection Devices
Blooms: Comprehension
51. __________ is a purchase of a dissident shareholder’s stock by the issuer at a premium over market, often in exchange
for a standstill agreement, whereby the shareholder agrees not to commence a tender offer or proxy contest or to buy
additional shares of the issuer for a period of time.
a.
Greenmail
b.
A freeze out
c.
Choice agreement
d.
Equitable agreement
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–6a Poison Pills
Blooms:Comprehension
52. In CASE 20.3 In re Citigroup Inc. Shareholder Derivative Litigation (2009), the Delaware Chancery Court
__________ the shareholders’ claims, holding that the allegations in the __________ were __________ to show that a
demand on the __________ would have been futile.
a.
affirmed, complaint, sufficient, shareholders
b.
dismissed, answer, insufficient, directors
c.
dismissed, complaint, insufficient, directors
d.
affirmed, answer, sufficient, directors
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
20–1b Duty to Exercise Reasonable Supervision
Blooms: Analysis
53. The __________ standard of review comes into place when a(n) __________ implements a defensive measure that
touches on issues of shareholder __________.
a.
Unocal, board of directors, voting control
b.
Blaisus, board of directors, voting control
c.
Revlon, board of directors, approval
d.
Blasius, CEO, voting control
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
20–6b Protecting the Shareholder Franchise and the Blasius Standard of Review
Blooms: Analysis
54. In CASE 20.6 Jones v. H. F. Ahmanson & Co. (1969), the court held that the defendants-__________ shareholders,
who did not allow the remaining shareholders to exchange their shares, breached a(n) __________ to the plaintiffs-
__________ shareholders, and ordered defendants to __________ to the plaintiffs.
a.
minority, financial duty, majority, pay damages
b.
majority, fiduciary duty, minority, return control of the corporation
c.
majority, fiduciary duty, minority, pay damages
d.
minority, duty of loyalty, majority, return control of the corporation
United States – BUSPROG: – ANALYTIC
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–9c Greenmail
Blooms: Comprehension
55. A __________ occurs when minority shareholders are forced to convert their shares into cash, for example, when a
subsidiary merges with its parent.
a.
hostile takeover
b.
sale of assets
c.
freeze out
d.
tender offer
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–9b Freeze-Outs
Blooms: Comprehension
56. The duty of __________ requires officers to exercise reasonable supervision over the business affairs of the
corporation.
a.
care
b.
loyalty
c.
obedience
d.
ethics
a
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
Introduction: Fiduciary Duties
Blooms: Comprehension
57. A __________ is an agreement in a proposed takeover that allows the board of directors to negotiate with other
bidders or to terminate a merger agreement.
a.
termination clause
b.
fiduciary out
c.
revolving door
d.
no talk provision
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–5f Deal Protection Devices
Blooms: Comprehension
DISC: – AICPA: BB-Legal
20–9a Sale of Control
Blooms: Analysis
58. Brice is on the board of ABC Corporation. XYZ Corporation has made a move to acquire ABC. Tina, the president of
ABC advises the board that the offer made by XYZ is a good one that should be accepted. She did not disclose, however,
that XYZ had offered her a generous bonus if she could convince the board members of ABC to take XYZ’s offer. Brice
tells the other board members that they should simply rely on Tina because she is probably right, and under the business
judgment rule they are protected even if she is wrong. Which of the following is true regarding Brice’s advice?
a.
Brice is correct.
b.
Brice is correct only if the directors of Success had been soliciting offers, and Tina was charged with
reviewing them.
c.
Brice is incorrect unless it can be established that Tina has prior experience in mergers and acquisitions.
d.
Brice is incorrect because no statement made by an officer is entitled to blind reliance.
Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation is looking for land on which to build a new facility. Tonya
locates suitable land, but purchases it for herself with plans to sell it at a profit at a later date. Rick, the majority
shareholder of Big Corporation hears about Tonya’s purchase and complains to her about it. She tells Rick that she viewed
and purchased the land on her own time and that she did not breach any duties owed to the corporation. Rick tells her that
she should reconsider and that he plans to discuss the matter with the rest of the board.
59. Refer to Fact Pattern 20–1. Which of the following is a widely used test for determining whether an opportunity
belongs to a corporation?
a.
The line-of-business test
b.
The time-spent test
c.
The corporate-interest test
d.
The officer-corporate equilibrium test
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
20–3a Corporate Opportunities
Blooms: Analysis
60. Refer to Fact Pattern 20–1. Which of the following is a right of the corporation if it is determined that an officer
wrongfully takes an opportunity belonging to the corporation?
a.
An absolute trust
b.
A constructive trust
c.
A 10% penalty based upon the value of the lost opportunity which is imposed by federal law
d.
As imposed by most states, a 10% penalty based upon the value of the lost opportunity
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
20-1 Business Judgment Rule and the Duty of Care
Blooms: Analysis
61. Refer to Fact Pattern 20–1. Did Tonya violate any duties owed to the corporation?
a.
Yes, by buying the land for herself without disclosure to the corporation, she violated the corporate
opportunity doctrine.
b.
Yes, by buying the land for herself without disclosure to the corporation, she violated the duty of responsible
decision making.
c.
Only if the land involved was worth over $50,000 did she violate any duties because any smaller amount
would be considered de minimus.
d.
No.
a
Challenging
20–3a Corporate Opportunities
62. Yolanda, a ballroom dance instructor, was recently asked to be a director of ABC Company which is publicly traded.
She is very honored and excited. Her friend, Joe, asked her if she had any experience in accounting, business, or SEC
requirements. Yolanda told him no, but that the president of ABC had assured her that the only responsibility of a director
was acting as a figurehead because the officers took care of all detailed corporate business. Yolanda says that she is
accepting the position because it will get her exposure in the community and perhaps increase her dance clientele. Is
Yolanda correct regarding her responsibilities, and why or why not?
a.
Yes, Yolanda is correct that the primary job of a director is to serve as a figurehead.
b.
Yolanda is correct that the primary job of an outside bank director is to serve as a figurehead, but that is not
true of inside directors.
c.
Yolanda is not entirely correct, but she has no affirmative responsibility to ensure the accuracy of any reports
because that is entirely the responsibility of officers of the corporation.
d.
Yolanda is incorrect, and the SEC emphasizes the responsibility of directors to ensure the accuracy and
completeness of public company filings with the SEC.
Challenging
20–1b Duty to Exercise Reasonable Supervision
63. What is a poison pill? What factors favor keeping a poison pill in place?
Challenging
20–3a Corporate Opportunities
64. Define and explain the purpose of the business judgment rule. Under what circumstances would the rule apply? When
would the protection not apply? Discuss fully.
65. What are the seven key factors that directors should consider in deciding whether to sell a company?
66. What is meant by the business judgment rule?
67. What was the conclusion of the court in Unocal Corporation v. Mesa Petroleum Co. regarding the application of the
business judgment rule to actions of directors in response to a takeover attempt?
68. Maurice is a fairly new director at ABC Corp. Peg, another director, tells him that she believes that the company is in
Revlon mode and that the directors should act accordingly. What is Peg referencing?
69. What is greenmail? What is a standstill agreement? When, if ever, is the process of greenmail protected by the
business judgment rule?