CHAPTER 22-LIFE AND DEATH OF A CORPORATION
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.
Answer: True
2. Generally, managers that make informed decisions will not be liable even if their decision
turned out badly.
Answer: True
3. A corporation must have a registered agent within the state of incorporation only if the
corporation maintains an office in that state.
Answer: False
4. 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.
Answer: False
5. Controlling shareholders have no fiduciary responsibility to minority shareholders.
Answer: False
6. A corporation is not allowed to issue dividends to shareholders unless it is solvent.
Answer: True
7. Sara decided to incorporate her business under the name Gomo, Inc. Before Gomo was
incorporated, Sara signed a contract in the name of Gomo, Inc. to lease a store front. Sara did
not tell the other party that Gomo was not yet formed. Sara is personally liable on the lease.
Answer: True
8. Incorporators are required to sign the charter, deliver it to the proper state officials, and
purchase a certain percentage of the initial stock offering.
Answer: False
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.
Answer: True
10. Owners of preferred stock typically have a preference in liquidation.
Answer: True
11. Common stock is last stock in line for any corporate payouts, including dividends and
liquidation payments.
Answer: True
12. A de jure corporation is not legal and cannot be recognized as a corporation because the
incorporation process was defective.
Answer: False
13. Terminating a corporation is a three-step process: dissolution, winding up, and
termination.
Answer: False
14. Corporate responses to takeover attempts are largely governed by federal law.
Answer: False
15. A corporation is required to have at least one class of stock with voting rights.
Answer: True
MULTIPLE CHOICE
1. 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.
Answer: D
2. Which of the following is NOT a method to acquire control of a company?
a. Buy stock from the shareholders through a tender offer.
b. Buy the company's assets.
c. Make an initial public offering.
d. Merge with the company.
Answer: C
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.
Answer: A
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.
Answer: C
5. In incorporating E-prise, the promoter gave an incorrect ZIP Code for the registered agent.
All of the other requirements for incorporation were met. E-prise is a(n):
a. de jure corporation.
b. de facto corporation.
c. corporation by estoppel.
d. indemnified corporation.
Answer: A
6. Defining a corporation with such information as the corporate name, the number and type
of authorized shares of stock, identification of the purpose and the agent, is done through the:
a. charter.
b. articles of incorporation.
c. certificate of organization.
d. All of the above. All of these terms are used to identify the same document.
Answer: D
7. MegaCorp occasionally sells products in Michigan. It does not have an office in that state
and does not advertise in Michigan. The company's marketing representatives are based in
New York but do travel to Michigan once a year to attend a trade show. Which statement is
correct?
a. MegaCorp must register in Michigan because its sales representatives attend a trade show
in Michigan.
b. MegaCorp is not required to register in Michigan because it does not have an ongoing
presence in Michigan.
c. MegaCorp must register in Michigan because its actions qualify as doing business.
d. Whether MegaCorp has to register in Michigan depends on where its shareholders reside.
Answer: B
8. 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.
Answer: B
9. Incorporation protects:
a. shareholders against personal liability for the debts of the company.
b. anyone involved in management of the business against personal liability for wrongdoing.
c. the public from wrongdoing by either the shareholders or the management of the
corporation.
d. All the above are correct.
Answer: A
10. Mike is planning on incorporating his business in the state of Delaware. The corporate
name of Mike's business must be different from:
a. that of any corporation that already exists in Delaware.
b. that of any limited liability company in Delaware.
c. the name of any sole proprietorship in Delaware.
d. all of the above.
Answer: A
11. Fashions, Inc. has 12 shareholders. There is no shareholder agreement concerning the
board of directors. The company is subject to the Model Act. How many directors is
Fashions, Inc. required to have?
a. None.
b. One.
c. Two.
d. Five.
Answer: A
12. 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.
Answer: D
13. 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.
Answer: A
14. Under most state statutes, a corporation may:
a. include in its charter a provision indemnifying directors unless they have engaged in
intentional misconduct or bad faith.
b. include in its charter a provision indemnifying directors under any circumstances in the
conduct of their duties for the corporation.
c. not include in its charter a provision indemnifying directors who engage in negligent
conduct of their duties.
d. not include in its charter any provisions regarding indemnification of directors.
Answer: A
15. Which of the following statements is correct?
a. Bonds are long-term debt secured by company assets.
b. Debentures are long-term unsecured debt.
c. Notes are short-term debt and may be secured or unsecured.
d. All the above are correct.
Answer: D
16. Which of the following is correct concerning anti-takeover efforts?
a. Most states have passed laws to deter hostile takeovers, but these statutes have not totally
eliminated hostile takeovers.
b. Federal statutes have been more effective than state statutes in eliminating hostile
corporate takeovers.
c. The most effective federal statute has been the Poison Pill Act.
d. Both b and c are correct.
Answer: A
17. MegaCorp is incorporated in the state of Delaware and is registered only in Delaware.
Jolene purchased a MegaCorp product from a company's sales representative following a
presentation in Michigan. Jolene was seriously injured by the product in Michigan. Under the
Model Act, if Jolene sues in Michigan, can MegaCorp defend the suit there?
a. MegaCorp may only defend against a lawsuit in Michigan if it first registers by paying
back fees, taxes, and penalties.
b. Yes, MegaCorp can bring or defend against a lawsuit in any state regardless of whether the
corporation is registered to business in that state.
c. Yes, MegaCorp can defend against a lawsuit in Michigan regardless of whether MegaCorp
is registered to do business in that state.
d. No. Jolene must sue and MegaCorp may defend a lawsuit only in Delaware.
Answer: C
18. 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.
Answer: B
19. 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.
Answer: C
20. Who has the right to manage the business of a corporation?
a. Shareholders.
b. Officers.
c. Bondholders.
d. The board of directors.
Answer: D
21. 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.
Answer: C
22. Who establishes executive compensation?
a. The board of directors.
b. The shareholders.
c. The officers themselves.
d. An independent CPA firm.
Answer: A
23. A corporation must obtain shareholder approval before the company:
a. sells off a major portion of its business to another company.
b. amends its bylaws.
c. amends its charter.
d. All the above are correct.
Answer: D
24. Luella just purchased 5 shares of common stock in TriColor, Inc. for $250. Luella has the
right to:
a. manage the day-to-day business of the corporation.
b. set executive compensation.
c. require that a proposal be placed in the company’s proxy statement to be voted on at the
shareholder meeting.
d. vote to elect directors.
Answer: D
25. If a court determines a manager's corporate decision amounted to self-dealing:
a. the business judgment rule will not apply.
b. the transaction being challenged will be automatically voided.
c. the manager is automatically personally liable to the corporation.
d. All the above.
Answer: A
ESSAY
1. What are some of the advantages for a business to incorporate in Delaware?
Answer: Delaware offers corporations several advantages:
• Laws that favor management. Delaware allows a great deal of flexibility for corporations
with respect to the management of the business. For example, if shareholders want to vote on
a matter in writing rather than holding a meeting, Delaware law requires only a majority vote
rather than a unanimous vote (as required in most other states). Delaware is very progressive
in passing legislation to permit corporations to operate with a minimum of rigid formalities.
• Delaware has a special court called a Chancery Court that hears only corporate matters. The
judges are experts in business matters. Corporate cases in Delaware can get to trial quickly.
• Given this special court structure, a large volume of corporate law precedent has developed
in Delaware. The precedent helps attorneys better advise their corporate clients since the law
is well defined.
2. Discuss how a corporation is terminated.
Answer: Ordinarily, terminating a corporation is a three-step process. First, the directors
recommend to the shareholders that the corporation be dissolved, and a majority of the
shareholders agree. Second, the corporation files “Articles of Dissolution” with the Secretary
of State. Third, the officers of the corporation pay its debts and distribute the remaining
property to shareholders. When this winding up is completed, the corporation ceases to exist.
Alternatively, the Secretary of State may dissolve a corporation that violates state law or a
court may dissolve a corporation if it is insolvent or if its directors and shareholders cannot
resolve conflict over how the corporation should be managed.
3. MegaCorp has five directors. The company has 1,050 shares of voting stock. Jessica would
like to purchase enough stock to elect herself to the board of directors. The company allows
for cumulative voting. Explain the concept of cumulative voting and also state how many
shares of MegaCorp stock Jessica will need to own to assure herself a place on the board of
directors.
Answer: Cumulative voting allows a shareholder to pool her votes for one nominee to the
board. The alternative, noncumulative voting, would allow her to vote one vote for each of
her voting shares for each nominee (not place multiple votes with one person). The formula
for cumulative voting is: Number of shares needed to elect one director = (Number of shares
outstanding ÷ Number of directors to be elected plus one) plus one. In this situation, if all five
directors are elected at the same time, then Jessica needs to purchase at least 176 shares of
voting stock [1,050/5 + 1] + 1 = 176]. If she has 176 votes, she can cast all her votes for
herself. Since 176 votes is enough to guarantee her election to the board, she will be elected.
4. Identify four circumstances that might persuade a court to pierce the corporate veil.
Answer: Courts generally pierce the corporate veil in four circumstances: (1) Failure to
observe formalities, such as holding shareholders' meetings or keeping minute books; (2)
commingling of assets of the corporation and the shareholders; (3) inadequate capitalization;
and/or (4) fraud.
5. Define and discuss the purposes of the "business judgment rule."
Answer: The business judgment rule is a common law concept that a director or officer who
makes a business judgment in good faith fulfills his duty to the company if (1) he is not
financially interested in the subject of his business judgment; (2) he is informed with respect
to the subject matter involved and to the extent appropriate under the circumstances; and (3)
he reasonably believes his judgment is in the best interests of the company. To be protected
by the business judgment rule, managers must act in good faith.
The "business judgment rule" is designed to accomplish three primary goals:
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.
6. Discuss how the Sarbanes-Oxley Act affects Haletronne Co., a publicly traded corporation.
Answer: The Sarbanes-Oxley Act applies to all publicly traded corporations in the United
States, as well as all foreign corporations listed on a U.S. stock exchange. Under the
Sarbanes-Oxley Act: the company must adopt effective financial controls; the CEO and CFO
must personally certify Haletronne’s financial statements; all members of the board’s audit
committee must be independent; Haletronne cannot make personal loans to its directors or
officers; if Haletronne has to restate its earnings, the CEO and CFO must reimburse the
company for any bonus or profits they have received from selling company stock within a
year of the release of the flawed financial statements; Haletronne must disclose if it has an
ethics code and, if it does not, why not; it may not interfere with a federal investigation into
fraud without incurring liability for a felony; whistleblowing employees are protected; and
Haletronne’s auditing will be overseen by a Public Accounting Oversight Board.
Test Bank For Introduction to Business Law
Jeffrey F. Beatty, Susan S. Samuelson
9781133188155
