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ANSWER KEY
Chapter 27 Managing the Corporate Person
Opening Case Questions
1. The text explains the plaintiff’s difficulties in the following way: “(T)he plaintiff argued that the
board was completely controlled by Fink and, as a result, the directors do whatever Fink
demands. The plaintiff argued further that, since it would be futile for him to ask the board for
help, he can skip over that troublesome and difficult step, and bring the suit directly. As
2. The demand futility doctrine is a legal principle in corporate law that says that, when a
shareholder can show that it would be useless to bring a complaint to the board of directors
4. The text explains the business judgment rule this way: “The business judgment rule emerges
from the duty of due diligence that a manager owes to the corporation. The duty of due
diligence consists of four parts. It says that, when acting on behalf of the corporation, a manager
5. The text explains the fairness rule this way: “The fairness rule requires managers to be fair to
the corporation when they personally benefit from their business decisions. The fairness rule
does not automatically declare managers disloyal if they profit from a corporate decision.
Rather, it allows the court to examine the decision to determine its basic fairness to the
A QUESTION OF ETHICS
Legislating Morality: Rendering to Caesar the Things that are Caesar’s and . . .
Special Directions to the Instructor: It is very demanding to ascertain answers that students will offer
for this ethical question, especially since the students must select which ethical theory to apply (market
value ethics, social contract ethics, utilitarianism, or rational ethics) as they formulate their responses.
Self-Evident Questions
1. The Sarbanes-Oxley Act is a reflection of general trends in this country concerning ethics
and morality because, like many similar provisions, it reveals that the people no longer believe that
2. Congress should also pass laws to regulate schools in the same way that Sarbanes-Oxley
regulates corporations. Schools could use such regulations to prevent cheating and bullying, and to
3. The Opening Case at the beginning of this chapter discusses how shareholders are
victimized by financial trends sometimes prompted by rumor, innuendo, and lies. Many of these rumors
are generated by the media. Unfortunately, Congress cannot shield stockholders from the media
Questions for Review and Discussion
1. Associative corporativism prospers when innovative people take risks. Risk takers employ one of
three positions. The risk taker may be an inventor or entrepreneur with a new idea, an original product,
or an innovative business technique. A second risk taker is the investor who is willing to put his or her
capital into a venture that may or may not reap dividends. The final risk takers are the managers
themselves, that is, those individuals who are willing to take a chance as the directors and officers of a
corporation. In order to be effective, corporate risk takers must avoid the central pitfall of associate
corporativism, that is, the tendency of a corporate system to move from a simple and direct hands-on
2. The directors of a corporation create the broad policies of a corporation, while the officers run the
4. In cumulative voting, the minority shareholders are given the chance to elect one or more
directors to the board of a corporation. Cumulative voting permits the shareholders to multiply their
shares by the number of directors to be elected. These votes can be cast for one director or distributed
5. A shareholder proposal is a suggestion about a board policy or procedure that is submitted by a
shareholder. The proposal cannot be about the ordinary day-to-day operation of the business. It must
6. A voting trust is an agreement among shareholders to transfer their voting rights to a trustee. A
trustee is a person who is given the management and control of another’s property and/or the rights
associated with that property. In a voting trust, the trustee actually votes the shareholders’ shares. A
7. A shareholder direct suit is brought by shareholders to vindicate a right that belongs to them
directly by virtue of their position as shareholders, such as the right to vote or to receive dividends. A
8. The business judgment rule states that a manager’s decision will stand as long as it was legal, was
made with due care and in good faith, and as long as the decision was made in the best interests of the
corporation. The fairness rule says that a decision made by a manager will stand if it is fair to the
9. The rights that belong to shareholders include the right to receive dividends, the right to vote (as
10. If the members choose to run the LLC, they become agents of the LLC. As agents they can enter
contracts on behalf of the LLC in most matters involving the ordinary operation of the LLC. However,
there are some provisions that require the agreement of all the members of the LLC. These matters
include, but are not limited to, disposing of the firm’s goodwill and submitting a claim of the LLC to
arbitration. Otherwise, the members of the LLC share their management powers in proportion to each
Cases for Analysis
1. The church members in this case had failed to exhaust internal remedies. They had made no
parliamentary moves to stop the election and had used their own absentee ballots in the voting that they
2. Yes. Weinberger was correct on two counts. First, since the meeting was defined as a special
meeting, the bylaws required that Weinberger be notified of the meeting. The fact that he was not
3. No. The business judgment rule also calls for due care in making business decisions in the best
interests of the corporation. In this case, the directors had not taken the time, or the effort, to investigate
4. The fairness rule should be used when evaluating the decisions made by the directors of S.L.&E.,
and LGT. The court said, “the business judgment rule presupposes that the directors have no conflict of
interest. When a shareholder attacks a decision in which the directors have an interest other than as
5. Yes. The trust created by Jackson was not a voting trust. In a voting trust, only voting rights are
transferred to the trustee. In the Jackson trust, all rights, including the right to sell the shares, were held
6. The suit was a derivative suit because it involved injury to the corporation, in this case Berlinair,
Inc., rather than an injury to the shareholder’s rights. The fairness rule should be used to judge
7. No. Naquin’s request to see the corporate records had to be honored by Dubois and Hoffpauir. He
8. Snodgrass could increase her voting power by purchasing more shares. She could use cumulative
voting if permitted by the bylaws. She could seek out other shareholders to obtain their proxies, form a
9. After exhausting internal remedies and making the required security deposit, Harris could bring a
END CHAPTER TWENTY-SEVEN
