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Flashcards in Exam II Deck (76):
1

One of the major advantages of a sole proprietorship is what?

Proprietor receives all of the profits

2

One of the major disadvantages of a sole proprietorship is what?

Proprietor bears burden of all losses

3

A local Taco Bell restaurant is an example of what kind of franchise?

A chain-style business operation

4

Which type of law primarily governs franchises?

Contract law (b/c a franchise is a contractual relationship)

5

With respect to payment for a franchise the franchisee normally:

a. pays an initial fee or a lump sum price for the franchise license
b. pays no initial fee but arranges to pay royalties on the income from the franchise operation
c. arranges w/ franchisor to do business for a one-year period before making any payments for the franchise
d. is not liable to pay the franchisor until profits are being realized

a. pays an initial fee or a lump sum price for the franchise license

6

Generally speaking, how do parties to a franchise contract determine which territory is to be served by the franchisee?

The franchisor decides

7

Who typically controls the day-to-day operations of a franchise?

The franchisee

8

If a franchisor exercises too much control over the operations of its franchisee, it may incur liability under what?

Agency law and the doctrine of respondeat superior

9

If no set time is given in a franchise agreement for winding up a franchisee's business, a franchisee:

a. must wind up the business w/i 7 working days
b. must be given a reasonable time to wind up the business
c. must wind up the business by whatever date the franchisor decides
d. does not need to wind up the business at all

b. must be given a reasonable time to wind up the business

10

If a court decides that a franchisor has arbitrarily or unfairly terminated a franchise:

a. the franchisee will be provided with a remedy for wrongful termination
b. the franchisor will be subject to a penalty of $10,000 regardless of the circumstances
c. the matter will automatically be submitted to arbitration
d. the franchisor will automatically be enjoined from terminating the franchise for a period of five years

a. the franchisee will be provided with a remedy for wrongful termination

11

In disputes over whether a partnership exists, which of the following is NOT considered to be an essential element?

a) An equal right in the management of the business
b) The consultation on business strategy
c) Joint ownership in the business
d) The sharing of profits or losses

b) The consultation on business strategy

12

Partnerships may be classified as general or limited and also as:

An aggregate or an entity

13

What property is used first to satisfy partnership debts?

Partnership property

14

Assume that Kyle and Larsen have a general partnership. What rights does each have regarding the management of the partnership?

They have equal management rights (even though one may have contributed more money to the partnership than the other, they have equal management rights)

15

The first stage in the termination of a partnership is known as:

Dissolution

16

If Frank, a dentist who is a member of a limited liability partnership (LLP), negligently harms Kathy while attempting to complete a root canal, what is the liability of the other members of the LLP?

Only the supervising partner will be liable, if there is a supervising partner

17

Jessica and her sister own a small farm producing organic fruits and juices. If they want to do business as partners, which form of partnership would be most appropriate for them to use?

A family limited liability partnership

18

The owners of a limited partnership are legally known as:

General and limited partners

19

In order for a limited partnership to be legally valid, it must:

File a certificate of limited partnership

20

Generally speaking, a limited partnership may be dissolved by which of the following events?

By the bankruptcy of a general partner

21

The key characteristics of a limited liability company (LLC) are:

the tax characteristics of a partnership, plus the limited liability of a corporation

22

To form an LLC:

articles of organization must be filed

23

One of the great benefits of LLCs, which helps promote investment, is that:

foreign investors are allowed to become LLC members.

24

With respect to LLCs, a member is someone:

who has an ownership interest in an LLC and limited liability for LLC debts.

25

When a group of members join to form an LLC, the name of their organization:

must include the words "limited liability corporation" or the letters "LLC."

26

One disadvantage of an LLC is that:

there is no uniform law governing LLCs in the United States.

27

Management of an LLC may take one of two forms, a member-managed LLC or a manager-managed LLC. In the latter:

the managers may be members only, nonmembers only, or a combination of both.

28

A group of twenty home-schooling parents in New Jersey get together and form a nonprofit membership organization whose purpose is to buy teaching materials and supplies. The parents have probably formed which type of business organization?

A cooperative (an association organized to provide an economic benefit, without a profit, to its members)

29

A joint-stock company may be described as:

A hybrid of a partnership and a corporation

30

A joint stock company has many features of a corporation. Which of the following is NOT one of the ways in which a joint-stock company is like a corporation?

a. Its shareholders have personal liability.
b. It is usually managed by directors or officers of the company.
c. It can have perpetual existence.
d. Its ownership is represented by transferable shares of stock.


a. Its shareholders have personal liability.

31

The responsibility for the overall management of a corporation belongs to whom?

BODs

32

Corporations may be taxed by whom?

State and federal governments

33

With respect to constitutional rights, corporations...

a. are identical to those held by natural persons.
b. enjoy more rights than those held by natural persons.
c. do not exist. Only individuals working for corporations have constitutional rights.
d. enjoy many of the rights held by natural persons.

d) are legally recognized as a "person" and enjoys many of the constitutional rights held by natural persons

34

In corporate law, when a corporation acts beyond the scope of its authority, it is said to:

Engage in ultra vires transactions

35

Which of the following is NOT a remedy for an ultra vires transaction?

a. The state attorney general may seek an injunction against the transaction or seek a dissolution order from a court.
b. The responsible officers can sue the corporation for damages.
c. The shareholders can sue on behalf of the corporation.
d. The corporation can sue the responsible corporate officers.

b. The responsible officers can sue the corporation for damages.

36

In simple terms, an "S" corporation could be defined as what?

A corporation whose S/Hs have limited liability but avoid corporate income taxes

37

Articles of incorporation contain:

a. the minutes of meetings of the board of directors.
b. resolutions of the board of directors.
c. information about the corporation, including its organization and functions.
d. a set of governing rules adopted by a corporation.

c. information about the corporation, including its organization and functions.

38

Which of the following is NOT required to prove de facto corporate status?

a. The enterprise must be doing business as a corporation.
b. Statutory corporate formalities were not followed.
c. A state statute must exist under which a valid incorporation could take place.
d. The parties made a good faith attempt to comply with a state incorporation statute.

b. Statutory corporate formalities were not followed.

39

Stock may be described as what?

An ownership interest in the corporation

40

When a court "pierces the corporate veil," what happens?

The court disregards the corporate entity and exposes the shareholders to personal liability.

41

Define quorum

minimum number of members of a decision-making body that must be present before business may be transacted

42

The fiduciary duties of directors and of corporate officers include the duty of loyalty and:

the duty of care (which includes a duty to make informed and rational decisions and a duty to exercise reasonable supervision of officers and employees)

43

Which of the following would likely be considered a breach of a director's duty of loyalty?

a. Having an interest in the corporation and its mission.
b. Competing with the corporation.
c. Exercising reasonable supervision.
d. Authorizing a transaction that is beneficial to minority shareholders.

b. Competing with the corporation.

44

Mark is a director of Bromley Corporation. Mark owns a printing company, and Bromley needs to have a book printed. If Mark contracts with Bromley to print the book, what must he do?

Make full disclosure of his interest to the other board members and abstain from voting on the matter

45

The business judgment rule states what?

states that directors and officers are immune from liability for exercising poor business judgment in certain circumstances (if they acted in good faith, took reasonable steps to become informed about the matter, had a rational basis for the decision, and did not have a conflict of interest between their personal interests and those of the corporation).

46

Suzy signs a written agreement with Phillip, giving Phillip the right to cast Suzy's votes for a certain group of people nominated for the Syllibar Corporation board of directors. This agreement between Suzy and Phillip is known as:

a proxy (which is authorization one shareholder gives to someone else to vote his or her shares in a particular, authorized way)

47

Lysco, Inc., gives to all 15,000 of its shareholders the right to purchase newly issued shares of Lysco stock in proportion to the percentage of shares they currently own and before anyone else is offered the shares. This right is known as:

preemptive right (the right of existing shareholders to buy newly issued shares before anyone else)

48

When a corporation is dissolved and its outstanding debts and the claims of its creditors have been satisfied, the remaining assets are distributed to:

the S/Hs (in proportion to the percentage of shares owned by each shareholder)

49

When a corporation suffers a wrong as a result of actions taken or not taken by the corporate directors, one effective and appropriate way to address the harm is through

S/H's derivative suit (When those in control of a corporation—the corporate directors—fail to sue in the corporate name to redress a wrong suffered by the corporation (or when the corporation has suffered a wrong resulting from the actions of the directors), the shareholders can bring a suit "derivatively," in the name of the corporation)

50

If a single shareholder owns a sufficient number of shares to exercise de facto control over the corporation, the shareholder owes the minority shareholders:

Fiduciary duty (When a single shareholder owns a sufficient number of shares to exercise de facto, or actual, control over the corporation, the shareholder owes a fiduciary duty to the minority shareholders)

51

When corporations merge with one another, which law must they follow?

Appropriate state laws

52

If Company F and Company G join and become Company H, what legal process has taken place?

Consolidation

53

Rothman Corporation and Zenco, Inc., combine and form a new company that retains the name, Rothman Corporation. When combining their firms, Rothman purchases all of the assets and assumes all of the liabilities of Zenco. This is an example of:

Merger

54

A short-form merger does not require the prior approval of shareholders. This type of merger involves:

A parent company purchasing a subsidiary

55

When a company that owns at least 90 percent of the target company is the acquiring company, this is known as what type of merger?

Short form merger

56

When will appraisal rights will be available?

Only when a state statute provides for them

57

Most corporate law is what type of law?

State law

58

Mitchell owns 3,000 shares of Dynamix Corporation. Dynamix decides to merge with Clomator, Inc., which makes plastic packaging for food. Mitchell is very unhappy about this decision. If Mitchell does not want to sell his stock, what is one other option he has to express his dissatisfaction?

If appraisal rights are available, he may choose to exercise those rights.

59

A corporation will be responsible for the liabilities of a selling corporation (when the purchaser buys the assets of the seller):

a. If the seller has existed for less than three years.
b. if the buyer is a rival.
c. if the sale amounts to what in fact is a merger.
d. If the seller produces consumer goods.

c) if the sale amounts to what in fact is a merger

60

If Diamond Ridge, facing a takeover attempt by Yellow Diamond, changes its retirement policy so that all corporate officers who retire are given one million dollar bonuses, plus their pension funds, this might be an example of:

Golden parachute

61

If Diamond Ridge, rather than creating large retirement benefits for its management, decides to give its shareholders rights to purchase additional shares at low prices, this might be an example of:

Poison pill

62

Which of the following is NOT a permissible way to bring about a corporate dissolution?

a. By executive order of the president.
b. By voluntary approval of the shareholders and directors.
c. By an act of the legislature of the state in which the company is incorporated.
d. By the unanimous action of all shareholders.

a. By executive order of the president.

63

What does Rule 14(a) in the 1934 Act govern?

Proxy regulations

64

What does Rule 10(b) in the 1934 Act govern?

Prohibits fraud with insider trading and disclosure regulations

65

What does Rule 16(b) in the 1934 Act govern?

Insider reporting and trading

66

What does Rule 13 in the 1934 Act govern?

Tender offer regulations

67

The reasons why the U.S. Congress passed securities legislation in the early 1930s was:

to help investors make more informed buying and selling decisions

68

Which of the following is NOT one of the major responsibilities of the SEC?

a. Issuing government bonds.
b. Supervising the activities of brokers and investment advisers.
c. Investigating securities law violations.
d. Regulating the purchase and sale of securities.

a. Issuing government bonds.

69

Which of the following probably is NOT a security?
a. 1,000 shares of IBM stock.
b. A bond.
c. A family home.
d. Mineral rights.

c. A family home.

70

The 1933 Securities Act requires that nonexempt organizations must file a registration statement with the SEC. Which of the following items must the statement contain?
a. A financial statement certified by a public accounting firm.
b. A marketing plan for the organization.
c. A proxy statement applicable for all new shareholders.
d. A free-writing prospectus.

a. A financial statement certified by a public accounting firm.

71

Which of the following is most likely to be an accredited investor?
a. A shipyard worker.
b. An insurance company.
c. A recent college graduate.
d. A family farmer.

b. An insurance company.

72

Under Rule 505 of the SEC's Regulation D, if an offer for a sale of securities is made solely to accredited investors, it may be exempt from registration if:

it involves an amount not more than $5 million

73

The most widely known provision of SEC Rule 10b-5 has to do with:

prohibition of insider trading

74

If an individual wrongfully obtains inside information and trades on it for his or her personal gain, the individual should be held liable because the person, in essence, stole information rightfully belonging to another. This is known as:

misappropriation theory

75

Section 16(b) of the Securities Exchange Act of 1934 provides for what?

- the recapture by a corporation of short-swing profits realized by insider trading

- EXPLANATION: If an insider profits from the purchase or sale of the company's stock within a six-month period, Section 16(b) allows the corporation to recapture the profits.

76

Basically, when the Internet is used for the delivery of a prospectus:
a. the rules that apply are different from the rules that apply to the delivery of a paper prospectus.
b. the same rules apply that apply to the delivery of a paper prospectus.
c. there is, in effect, no legal delivery because the SEC has not yet developed rules to cover this situation.
d. the rules require that the delivery be certified, unlike the rules governing the delivery of a paper prospectus.

b. the same rules apply that apply to the delivery of a paper prospectus.