CHAPTER 20 – CORPORATIONS
TRUE/FALSE
1. Zach decided to incorporate his business under the name of “Zamm.” In addition to “Zamm,” the
Model Act requires that Zach include one of the following words: “corporation,” “incorporated,”
“limited,” or “company” or an abbreviation thereof.
2. Under corporate law, a corporation that officially states its purpose is “to engage in any lawful activity
for which corporations may be organized under the General Corporation Law of Idaho” is too broad. A
corporation’s purpose must be more narrowly defined.
3. A corporation is not allowed to issue dividends to shareholders unless such sale is authorized in the
charter.
4. Incorporators are required to sign the charter, deliver it to the proper state officials, and purchase a
certain percentage of the initial stock offering.
5. Common stock is last stock in line for any corporate payouts, including dividends and liquidation
payments.
6. Terminating a corporation is a three-step process: dissolution, winding up, and termination.
7. The “business judgment rule” has been replaced by “good faith statutes” in most states.
8. Directors have the authority to manage the corporate business.
9. A director violates the corporate opportunity doctrine if he or she competes with the corporation,
unless the disinterested directors approve of the director’s actions.
10. Corporate managers serve only one master, which is the best interest of the shareholders.
11. A proxy is a vote that is mailed in, like an absentee ballot.
12. A corporation is required to have at least one class of stock with voting rights.
13. Recent legislation has stipulated that boards of directors should be made up of more independent
directors who are less likely to simply go along with whatever the CEO wants.
14. In either a derivative lawsuit or a direct shareholder lawsuit, any proceeds awarded by the court must
be paid to the corporation, not the shareholders themselves.
15. Larry has owned $5,000 of stock in E-prise, Inc. for the past 18 months. Under SEC rules, Larry can
require that one proposal be placed in the company’s proxy statement to be voted on at the shareholder
meeting.
MULTIPLE CHOICE
1. Laurie is incorporating her business. Laurie’s home state is Wisconsin. Business will be conducted in
California, Michigan, Pennsylvania, and Virginia. Laurie:
a.
must incorporate the business in Wisconsin, the home state.
b.
must incorporate the business in Wisconsin, California, Michigan, Pennsylvania and
Virginia.
c.
must incorporate in Delaware.
d.
can incorporate the business in any state.
2. Carey decided to incorporate her business under the name yStar Inc. Before yStar was incorporated,
Carey signed a contract in the name of yStar, Inc. to have some office space remodeled. Which
statement is correct?
a.
yStar is liable on the contract because the contract was signed in its name.
b.
yStar becomes liable on the contract as soon as it is incorporated.
c.
yStar is liable on the contract if the contractor knows that the corporation does not yet
exist.
d.
yStar will be liable on the contract only if the corporation adopts the contract.
3. A corporate charter is filed with:
a.
a state’s Secretary of State office.
b.
a state’s Treasury and/or Revenue Division.
c.
the United States Department of Commerce.
d.
All the above.
4. MegaCorp purchased 10,000 shares of its own stock that had previously been owned by private
investors. The stock MegaCorp repurchased is called:
a.
authorized and unissued.
b.
authorized and issued.
c.
treasury stock.
d.
repurchased stock.
5. Corporate stock can be divided into categories called ________, which can be further divided into
________.
a.
authorized shares, classes.
b.
classes, series.
c.
equity, assets.
d.
debentures, classes.
6. Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is
Fashions, Inc. required to have?
a.
A president, secretary, and treasurer.
b.
A president and a secretary, and they can be the same person.
c.
A president, at least one vice-president, a secretary, and a chief financial officer.
d.
Whatever officers are described in the corporate bylaws.
7. The officers of a corporation are:
a.
chosen by the board of directors.
b.
appointed by the president of the company.
c.
elected by shareholders.
d.
appointed by the Secretary of State.
8. MegaCorp is incorporated under Delaware law. It is registered to do business in New York. Legally, in
New York MegaCorp is known as what kind of corporation?
a.
Domestic.
b.
Foreign.
c.
Alien.
d.
Cumulative.
9. What is meant by the term “piercing the corporate veil”?
a.
Corporate directors and/or officers may be held personally liable to a person damaged by
an act of the corporation.
b.
Corporate shareholders may be held personally liable to a person damaged by an act of the
corporation.
c.
Both of the above.
d.
None of the above.
10. The executives of Jornaginn Corporation have decided they need to sell 50,000 additional shares of
stock to finance their expansion plans. The executives:
a.
cannot sell that many shares unless they were authorized initially in the corporate charter.
b.
can sell as many shares as the market will bear.
c.
are limited by the number of shares authorized in the corporate charter, but this number
can be increased by amending the charter and paying a fee.
d.
can sell the shares only if the shares have a par value which is close to the current market
price.
11. Jenny is an officer of a corporation. She made a difficult business decision. When challenged about her
decision, the court ruled she had acted in good faith and that the business judgment rule applied. As
such:
a.
Jenny will not be held personally liable for a decision that results in money losses to the
company.
b.
Jenny’s decision will be reviewed by a court.
c.
Jenny is immune from a lawsuit.
d.
Jenny must resign from the board.
12. Which of the following describes the duty of loyalty?
a.
It requires managers to make decisions they reasonably believe to be in the best interest of
the corporation.
b.
It prohibits making a decision that benefits the decision-maker at the expense of the
corporation.
c.
It requires consideration of the interests of the surrounding community.
d.
It requires using care that an ordinarily prudent person would take in a similar situation.
13. Alex is a director of ABC, Inc. Alex wants to personally make a major purchase from Bravo Co. If it
knew of the opportunity, ABC might be also interested in making that same purchase. Alex must:
a.
advise the boards of both corporations of his conflict of interest.
b.
first offer the opportunity to make the purchase to the disinterested directors of ABC or its
shareholders.
c.
resign from the board of directors.
d.
abandon the idea of making the purchase himself.
14. For the business judgment rule to apply:
a.
there must be a conflict of interest.
b.
the director must exercise extraordinary care.
c.
the director must act in the best interests of the corporation.
d.
All of the above.
15. The term “corporate manager” refers to:
a.
directors.
b.
corporate officers.
c.
Both of the above.
d.
None of the above.
16. Management’s duty to have a rational business purpose, avoid illegal behavior, and make informed
decisions refers to its:
a.
duty of care.
b.
duty of loyalty.
c.
duty of openness.
d.
duty of fairness.
17. Who has the right to manage the business of a corporation?
a.
Shareholders.
b.
Investors.
c.
Bondholders.
d.
The board of directors.
18. A corporation’s obligation to provide shareholders with financial information:
a.
depends on whether the company is publicly or privately held.
b.
is enforced by the Model Business Corporation Act.
c.
is extensive and is regulated by the SEC if the company is publicly held.
d.
All the above.
19. Under the Model Act, who has the right to call a special meeting of the shareholders to vote on an
emergency issue that cannot wait until the next annual meeting?
a.
Shareholders who own at least 10 percent of a company’s stock.
b.
The board of directors.
c.
Both of the above.
d.
None of the above.
20. In a derivative lawsuit, the named plaintiff:
a.
is the corporation on whose behalf the lawsuit is filed.
b.
is the particular class of shareholders primarily injured by the wrong.
c.
consists of all the corporation’s shareholders.
d.
is the board of directors for the corporation.
21. Who establishes executive compensation?
a.
The board of directors.
b.
The shareholders.
c.
The officers themselves.
d.
An independent CPA firm.
22. Before filing a derivative lawsuit, shareholders must:
a.
notify the board that the corporation has been wronged and ask the board to bring suit in
the name of the corporation directly.
b.
notify the Secretary of State that the corporation has been wronged and ask the Attorney
General to file the lawsuit on behalf of the corporation.
c.
hold a special meeting, and a majority of the shareholders must vote to file the lawsuit.
d.
place the lawsuit on the company’s proxy statement, and the proposal must receive a
majority vote.
23. Charles owns 1,000 shares of stock in Temperan, Inc. Charles wants to obtain corporate records
including the corporation’s minute book and accounting records. Under the Model Act, Charles is
entitled to this information if he requests it in good faith and:
a.
he has a proper purpose.
b.
he owns at least 1 percent of the company or $2,000 of stock.
c.
he is an employee of Temperan.
d.
he is a controlling shareholder.
24. Veritas, Inc. is planning its annual shareholder meeting on June 15. The company:
a.
need not send notices of the meeting to shareholders since it is the regularly scheduled,
annual meeting, which Veritas always holds on the third Thursday of June.
b.
must send notices to everyone who owns stock as of January 1.
c.
must send notices to everyone who owns stock on the “record date,” which can be no more
than 70 days before the meeting.
d.
is not required to have an annual shareholders meeting if the company is listed only on the
NYSE.
25. The Model Business Corporation Act states: “All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the corporation managed by or under the direction of its:
a.
shareholders.”
b.
officers.”
c.
board of directors.”
d.
executive committee.”
ESSAY
1. What are some of the advantages for a business to incorporate in Delaware?
2. Discuss how a corporation is terminated. Identify four circumstances that might persuade a court to
pierce the corporate veil.
3. What is the definition of the business judgment rule? Discuss its purposes.
1. To allow directors to do their job without constantly being concerned about personal liability.
2. To keep judges out of corporate decision making.
3. To encourage people to become corporate directors by limiting their potential liability.
4. Loraine is a shareholder of Taley Corp. She would like to inspect and copy the company’s minute
book, accounting records, and shareholder lists. Under what circumstances is Loraine allowed to
inspect or copy corporate records?
5. Kalina is the CEO of Northfield Corporation. Who sets her compensation, and what types of
compensation would she likely receive in addition to her salary? Can shareholders do anything to
challenge her level of compensation if they think it is unfairly high in comparison to average employee
compensation within the company?
ANS:
