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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. Normally, a corporate board of directors appoints itself as the first board at the
time the corporation is created.
B2. In most states, a director cannot be removed without cause unless the
shareholders have reserved the right to do so at the time of election.
B3. Most states do not permit the corporate articles or bylaws to authorize
compensation for directors.
B4. A director who does not hold a management position in the corporation is an
outside director.
2 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B5. Each director can access the corporation’s facilities and premises.
B6. 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.
B7. In most states, an individual cannot hold more than one corporate office and be
both an officer and a director of the corporation.
B8. The board of directors normally can remove a corporate officer at any time with
or without cause.
B9. A director or officer is liable to the corporation or its shareholders for honest
mistakes of judgment and bad business decisions.
B10. Directors cannot use corporate funds or confidential corporate information for
personal advantage.
B11. Directors and officers must subordinate the welfare of the corporation to their
personal interests.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 3
B12. Directors are prevented from ever having financial dealings with the
corporations they serve.
B13. Shareholders own the corporation, and they have legal title to corporate
property.
B14. Shareholders have the power to vote to elect or remove members of the board
of directors.
B15. A straight majority vote of the shares represented at a shareholders’ meeting is
usually required to pass resolutions.
B16. Preemptive rights permit a director to veto, or “preempt,” any proposal that the
shareholders have voted to approve or disapprove.
B17. Dividends can be paid from the undistributed net profits earned by the
corporation.
B18. Restrictions on the transfer of shares in a close corporation are usually void.
B19. A court will dismiss a derivative suit if a majority of the directors or an
independent panel determines in good faith that the lawsuit is not in the best
interests of the corporation.
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B20. Usually, the shareholder who receives watered stock must pay the difference
between the price paid for the shares and their fair market value to the
corporation.
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. initial board of directors.
b. incorporators.
c. first officers.
d. preferred shareholders.
B2. Merina and Nelli form Orchids, Inc. Ultimate responsibility for policy decisions
necessary to the management of corporate affairs rests with Orchids’s
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
B3. Aviators Source Corporation makes and sells aircraft parts. In most states, the
minimum number of directors that must be present before Aviators Source’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.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 5
B4. 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.
B5. 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.
B6. 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.
B7. Char and Doug are officers of Eden Cruise & Travel Corporation. As corporate
officers, the rights of Char and Doug are
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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. Dionne is an officer of Event Ticketing, Inc. As an officer, with respect to the
corporation, Dionne is
a. a fiduciary.
b. a forum.
c. a proxy.
d. a quorum.
B9. Tucker is a director of USA Auto Parts, Inc. Under the standard of due care
owed by directors of a corporation, Tucker’s decisions must be
a. unwavering and unquestionable.
b. arguable and defensible.
c. informed and reasonable.
d. perfect and unassailable.
B10. Rafi, a director of Super Service Station Corporation, does not attend a board
meeting for three years. During that time, Twyla, Super’s president, makes
improper loans that cost the company $100,000. Rafi 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.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 7
B11. 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.
B12. 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.
B13. 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.
B14. 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.
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B15. 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.
B16. Kiefer, Lori, and Moira are shareholders of Nationmade Flags & Banners
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. 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.
B18. 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.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS 9
d. sell a prorated share of a new issue of stock before other sellers.
B19. 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.
B20. 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
B1. Donatello is a director and officer of Enzio’s Pizza Corporation. Donatello
selects an ad campaign that consumers find offensive—a marketing decision
that results in a dramatic decrease in profits for the firm and its shareholders.
The shareholders accuse Donatello of breaching his fiduciary duty to the
corporation. What is Donatello’s best defense against this accusation? Later, a
resolution comes before Enzio’s board to expand its menu to compete with
Fabio’s Pasta Palace Restaurants Inc. Donatello is a director and shareholder
of Fabio’s. What is Donatello’s responsibility in this situation?
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B2. 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?