1
UNIT 1
BUSINESS ORGANIZATIONS
ANSWERS TO LEGAL REASONING QUESTIONS
1. Three decades ago, corporations and corporate directors were rarely
prosecuted for crimes, and penalties for corporate crimes were relatively light. Today,
this is no longer true. Under the corporate sentencing guidelines, corporate wrongdoers
can receive substantial penalties. Do these developments mean that corporations are
committing more crimes today than in the past? Will stricter laws be effective in curbing
corporate criminal activity? How can a company avoid liability for crimes committed by
its employees? No, these developments do not mean that corporations are more criminal than
in the past. It is more likely that crime is perpetually ongoing. But every now and then, scandals
The lesson that Congress intended for the business world is, of course, that if business
leaders do not behave ethically (and legally), the government will create new laws and
regulations that force them to do so. It is always the hope that stricter laws will be effective in
One of the surest ways for a company to avoid liability for crimes committed by its
employees is to prevent the commission of such crimes in the first place. As suggested in the
previous paragraph, a corporation might refuse to broach the smallest violation of company
rules. The firm might impose and enforce check and double-check routines—in the handling of
corporate funds, for example—that would be likely to catch any criminal activity before it
succeeds. Such corporate controls could ensure that employees receive the benefits they earn,
but only the benefits they earn. This also helps to ensure that the actions taken by the
2 UNIT ONE: BUSINESS ORGANIZATIONS
employees are in the best interests of the company. In this way, the corporation can be
confident that it is at least acting ethically toward its shareholders. And criminal penalties can be
2. Do you agree that when a corporation is approaching insolvency, the
directors’ fiduciary obligations should extend to the corporation’s creditors as well as to
the shareholders? Why or why not? The answer to this question, according to some courts, is
yes. In a leading case on this issue, discussed in the text, one state court noted that “the
possibility of insolvency can do curious things to incentives, exposing creditors to risks of
Of course, it is a long-standing principle that corporate directors ordinarily owe fiduciary
duties only to a corporation’s shareholders. In some cases, in other circumstances, directors
The picture changes, however, when a corporation approaches insolvency. This is
because at that point, the shareholders’ equity interests in the corporation may be worthless,
while the necessity to recognize the interests of creditors becomes acute. Thus, when a
3. When a company’s executives offer opinions about the firm’s financial
status and future business prospects through blogs, social media, and other Internet
forums, the SEC can hold the company liable for violating securities laws. Is this fair to
investors who want to hear the straight scoop from the firm’s executives? What
arguments can you make in favor of this restriction? What arguments can you make
against it? Corporations that use the Internet to distribute information about the company to
investors, however, need to make sure that they comply with the regulations issued by the SEC.
In favor of this enforcement, one might point to the SEC release outlined in the text. The
SEC generally embraces new technology and encourages companies to use electronic
communication methods. But the SEC also emphasizes that “while blogs or forums can be
in whole or in part.
2 UNIT ONE: BUSINESS ORGANIZATIONS
employees are in the best interests of the company. In this way, the corporation can be
confident that it is at least acting ethically toward its shareholders. And criminal penalties can be
2. Do you agree that when a corporation is approaching insolvency, the
directors’ fiduciary obligations should extend to the corporation’s creditors as well as to
the shareholders? Why or why not? The answer to this question, according to some courts, is
yes. In a leading case on this issue, discussed in the text, one state court noted that “the
possibility of insolvency can do curious things to incentives, exposing creditors to risks of
Of course, it is a long-standing principle that corporate directors ordinarily owe fiduciary
duties only to a corporation’s shareholders. In some cases, in other circumstances, directors
The picture changes, however, when a corporation approaches insolvency. This is
because at that point, the shareholders’ equity interests in the corporation may be worthless,
while the necessity to recognize the interests of creditors becomes acute. Thus, when a
3. When a company’s executives offer opinions about the firm’s financial
status and future business prospects through blogs, social media, and other Internet
forums, the SEC can hold the company liable for violating securities laws. Is this fair to
investors who want to hear the straight scoop from the firm’s executives? What
arguments can you make in favor of this restriction? What arguments can you make
against it? Corporations that use the Internet to distribute information about the company to
investors, however, need to make sure that they comply with the regulations issued by the SEC.
In favor of this enforcement, one might point to the SEC release outlined in the text. The
SEC generally embraces new technology and encourages companies to use electronic
communication methods. But the SEC also emphasizes that “while blogs or forums can be
in whole or in part.