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Chapter 37
Corporate Governance and Sarbanes-Oxley-Act
VI. Answers to Critical Legal Thinking Cases
37.1 Proxy
No, Smith and Gibbons cannot reverse their proxy agreement with Zollar. A normal proxy, unless
otherwise stated, is valid for 11 months. A proxy becomes irrevocable for a longer period if the proxy
states that it is irrevocable, and it is coupled with an interest. Smith and Gibbons had given Zollar a proxy
37.2 Dividends
Gay’s Super Markets wins the suit. The payment of dividends is at the discretion of the board of directors.
The directors are responsible for determining when, where, how, and how much will be paid in dividends.
Corporations often do not pay dividends, but retain profits in the corporation to be used for research
expense, internal expansion, and other anticipated needs. Courts will only order a corporation to declare a
37.3 Duty of Loyalty
in his own name. When this action was discovered, Berk used his former position to retain the lease and
open his own Comedy Club. This new club was in direct competition with his old corporation. Because of
37.4 Piercing the Corporate Veil
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of Wildhorn Ranch, Inc., and ran the corporation without observing any of the necessary corporate
the District of Colorado)
VII. Answers to Ethics Cases
37.5 Ethics Case
others set up a competing business without informing the corporation or its shareholders. They also used
Ideal’s assets and facilities to build their own business and recruit customers for it. These actions by
Gaffney and the other officers constituted a breach of their duty of loyalty to Ideal, and the corporation
was able to recover damages from them. Gaffney definitely acted unethically in this case. He owed and
37.6 Ethics Case
The District Court correctly found Farms to be the alter ego of Chemicals. First, Farms did not have a
separate financial existence. The $10,000 investment created a thin corporation (diaphanous) that
depended upon its parent Chemicals for transfusions of working capital. Second, the nature of the loans to
entity. Thomas acted unethically in this case by engaging in fraudulent conduct by which he and his
companies stole millions of dollars from the federal government. United States of America v. Jon-T
