R8-3 Flashcards
Which of the following facts is(are) generally included in a corporation’s articles of incorporation?
~~Name of registered agent
~~Number of authorized shares
a.
Yes
Yes
b.
Yes
No
c.
No
No
d.
No
Yes
Choice “a” is correct.
Rule: The articles of incorporation generally must contain both the name of a registered agent upon whom process may be served and the number of shares authorized to be issued.
Choices “b”, “d”, and “c” are incorrect, per the above rule.
The limited liability of a stockholder in a closely held corporation may be challenged successfully if the stockholder:
a.
Undercapitalized the corporation when it was formed.
b.
Formed the corporation solely to have limited personal liability.
c.
Sold property to the corporation.
d.
Was a corporate officer, director, or employee.
Choice “a” is correct. The limited liability of a shareholder in a closely held corporation may be challenged where the shareholder undercapitalized the corporation when it was formed. Courts can “pierce the corporate veil.”
Choice “b” is incorrect. Forming a corporation to limit personal liability is a perfectly valid reason for electing the corporate form of doing business.
Choice “c” is incorrect. The shareholder may sell property to the corporation.
Choice “d” is incorrect. Shareholders may serve as corporate officers, directors, or employees.
Jones, Smith, and Bay wanted to form a company called JSB Co. but were unsure about which type of entity would be most beneficial based on their concerns. They all desired the opportunity to make tax-free contributions and distributions where appropriate. They wanted earnings to accumulate tax-free. They did not want to be subject to personal holding tax and did not want double taxation of income. Bay was going to be the only individual giving management advice to the company and wanted to be a member of JSB through his current company, Channel, Inc. Which of the following would be the most appropriate business structure to meet all of their concerns?
a.
Proprietorship.
b.
C corporation.
c.
S corporation.
d.
Limited liability partnership.
Choice “d” is correct. An LLP does not pay taxes on its earnings. Instead, the profits and losses flow through to the partners as in a general partnership. The LLP files an informational tax return like that of a general partnership. The partners may agree to have the entity managed by one or more of the partners. A partner may be another entity.
Choice “a” is incorrect. A proprietorship by definition has only one owner, not three owners.
Choice “c” is incorrect. While an S corporation allows for the same treatment of its earnings and distributions as in the facts, it is prohibited from having another company as an owner.
Choice “b” is incorrect. A C corporation pays its own taxes on its earnings, and any distributions to its shareholders are again taxed at the shareholder level (known as “double taxation”).
Formation of which of the following types of business does not require the filing of documents with the state?
~~Corporation
~~Limited Partnership
~~Sole Proprietorship
a.
Need not file
Need not file
Need not file
b.
Must file
Must file
Need not file
c.
Must file
Need not file
Must file
d.
Need not file
Must file
Need not file
Choice “b” is correct. A sole proprietorship can be formed without filing with the state. Formation of either a corporation or a limited partnership requires a filing.
Choices “a”, “d”, and “c” are incorrect per the explanation above.
Which of the following statements is a general requirement for the merger of two corporations?
a.
The merger plan must be approved unanimously by the stockholders of both corporations.
b.
The stockholders of both corporations must be given due notice of a special meeting, including a copy or summary of the merger plan.
c.
The absorbed corporation must amend its articles of incorporation.
d.
The merger plan must be approved unanimously by the boards of both corporations.
Choice “b” is correct. Both corporations must give shareholders notice and a summary of the merger plan.
Choice “a” is incorrect. A merger plan need only be approved by a majority of the shareholders, not by all shareholders.
Choice “d” is incorrect. The merger plan needs to be approved only by a majority of each board of directors of the corporations.
Choice “c” is incorrect. The absorbed corporation ceases to exist; its articles need not be amended.
Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation?
a.
An officer of a corporation is required to own at least one share of the corporation’s stock.
b.
A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.
c.
Stockholders always have the right to elect a corporation’s officers.
d.
An officer may not simultaneously serve as a director.
Choice “b” is correct. A corporation may indemnify its officers for liabilities incurred in a suit by stockholders, especially if the officer prevails.
Choice “d” is incorrect. There is no restriction against serving as both a director and an officer.
Choice “c” is incorrect. The RMBCA provides that officers are to be appointed by the board unless the bylaws provide otherwise.
Choice “a” is incorrect. There is no requirement that an officer own stock in the corporation in which he or she serves.
Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B?
a.
Hiring employees who are residents of state B.
b.
Collecting corporate debts in State B.
c.
Maintaining bank accounts in State B.
d.
Maintaining an office in State B to conduct intrastate business.
Choice “d” is correct. A domestic corporation is one created under the laws of a given state. A foreign corporation is a corporation created under the laws of another state. A foreign corporation must obtain a certificate of authority from each state in which it does intrastate business. Maintaining an office in State B is a clear indication that Case was “doing business” in State B.
Choices “c”, “b”, and “a” are incorrect because maintaining a bank account, collecting debts, and hiring employees who live within a state are not considered to be “doing business” within the state.
Which of the following statements is(are) correct regarding the methods a target corporation may use to ward off a takeover attempt?
I.
The target corporation may make an offer (“self-tender”) to acquire stock from its own shareholders.
II.
The target corporation may seek an injunction against the acquiring corporation on the grounds that the attempted takeover violates federal antitrust law.
a.
I only.
b.
Neither I nor II.
c.
Both I and II.
d.
II only.
Choice “c” is correct.
Rule: A tender offer is a general invitation by a bidder to the shareholders of a target company to tender their shares to the bidder at a specified price during a specified time. A target of a takeover may ward off a tender offer by offering to repurchase shares from its shareholders. If a takeover will violate federal antitrust law, a court will enjoin the takeover.
Choices “a”, “d”, and “b” are incorrect, per the above rule.
Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn’s objectives without requiring the approval of the shareholders of either corporation?
a.
A merger of Trend into Acorn, whereby Trend shareholders receive cash or Acorn shares.
b.
A sale of all the assets of Trend, outside the regular course of business, to Acorn, for cash.
c.
An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares.
d.
A cash tender offer, whereby Acorn acquires at least 90% of Trend’s shares, followed by a short-form merger of Trend into Acorn.
Choice “d” is correct. A parent corporation owning 90% or more of a subsidiary may merge the subsidiary (short form merger) into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary’s board.
Choices “a”, “b”, and “c” all require at least one of the corporations to follow the general procedure for fundamental corporate changes (i.e., board resolution notice, approval by majority shares, and filing).
Which of the following parties generally has the most management rights?
a.
Limited partner in a general partnership.
b.
Minority shareholder in a corporation listed on a national stock exchange.
c.
Member of a limited liability company.
d.
Limited partner in a limited partnership.
Choice “c” is correct. Unless the articles or operating agreement provides otherwise, all members of the LLC have a right to participate in management. A member of a limited liability company has the most management rights of any of the parties listed. A minority shareholder in a corporation has no management rights (and neither does a majority shareholder). A limited partner has no day-to-day management rights but may have some rights in extraordinary circumstances. It is unclear what a limited partner in a general partnership would even be; the existence of a limited partner would make a partnership a limited partnership and not a general partnership.
Choice “b” is incorrect. Stockholders have very limited rights to run the corporation. They generally only have the right to elect directors and to vote on fundamental changes in the corporation. Such fundamental changes would include dissolutions, amendments to the articles, mergers, consolidations, compulsory share exchanges, and sale of substantially all of the corporation’s assets.
Choice “a” is incorrect. There are no limited partners in a general partnership. There are only general partners. Since there are no limited partners, there are no management rights for limited partners.
Choice “d” is incorrect. Limited partners in a limited partnership have very limited rights to participate in the management of the business. In fact, if they do participate in management, they face potential liability to those who thought they were a general partner (i.e., if a limited partner becomes involved in day-to-day management is some way (participating in control), she may be treated as a general partner and lose her limited liability).
Under the Revised Model Business Corporation Act, which of the following statements regarding a corporation’s bylaws is(are) correct?
I.
A corporation’s initial bylaws shall be adopted by either the incorporators or the board of directors.
II.
A corporation’s bylaws are contained in the articles of incorporation.
a.
I only.
b.
Neither I nor II.
c.
II only.
d.
Both I and II.
Choice “a” is correct. Under the Revised Model Business Corporation act, a corporation’s initial bylaws may be adopted by either the incorporators or the board of directors.
Choices “c” and “d” are incorrect, because the corporation’s bylaws are a separate document not included in the corporation’s articles of incorporation.
Choice “b” is incorrect, because under the Revised Model Business Corporation Act, a corporation’s initial bylaws may be adopted by either the incorporators or the board of directors.
Which form of business entity has the following attributes?
I.
Limited liability for all its owners.
II.
Can permit all its owners to participate in management and control of the entity.
III.
Absent an agreement to the contrary, is dissolved on the death, withdrawal, or bankruptcy of an owner.
a.
A limited liability company.
b.
A corporation.
c.
A limited partnership.
d.
A general partnership.
Explanation
Choice “a” is correct. All members in a limited liability company have limited liability. Unless they choose otherwise, all members of a limited liability company may participate in management. A limited liability company is dissolved upon the death, retirement, resignation, bankruptcy, etc., of a member.
Choice “c” is incorrect. A limited partnership must have at least 1 general partner and 1 limited partner. The general partner has unlimited liability for all limited partnership debts. Additionally, limited partners have a limited right to manage.
Choice “d” is incorrect because general partners in a general partnership have unlimited liability.
Choice “b” is incorrect on two counts. First, although shareholders are the owners of the corporation, they generally have no power to run the corporation. That is done by the board and the officers. Second, death, withdrawal or bankruptcy of a stockholder does not dissolve a corporation.
Two individuals are planning to form a business with equal ownership. The individuals would like to limit their personal liability, avoid double taxation, and be active in the business. Which of the following organizational structures would meet their requirements?
a.
Limited partnership.
b.
Limited liability company.
c.
General partnership.
d.
C corporation.
Choice “b” is correct. The objectives of the two individuals are to limit liability, avoid double taxation, and be active in management. As limited liability company members, they would have no liability beyond their investment. With a limited liability company, the entity would be taxed like a partnership (thus no double taxation) unless they chose otherwise. As limited liability company members, they would have the right to participate in management decisions of the LLC.
Choice “d” is incorrect because a C corporation is subject to double taxation.
Choice “a” is incorrect because in a limited partnership there are both limited and general partners. The general partners have the right to manage, but have unlimited liability. The limited partners have no liability beyond their investment, but have no right to manage or control. Thus, they cannot have both limited liability and the right to manage in a limited partnership.
Choice “c” is incorrect because a general partner in a general partnership has unlimited liability.
Under the Revised Model Business Corporation Act, which of the following must be contained in a corporation’s articles of incorporation?
a.
Quorum voting requirements.
b.
Names of stockholders.
c.
The number of shares the corporation is authorized to issue.
d.
Provisions for issuance of par and nonpar shares.
Explanation
Choice “c” is correct. The articles must set out the corporation’s authorized shares.
Choice “a” is incorrect. Quorum requirements, if stated at all, usually are in the bylaws; they need not be included in the articles of incorporation.
Choice “b” is incorrect. The articles need not include the names of stockholders.
Choice “d” is incorrect. The RMBCA has eliminated the concept of par value and so does not have a requirement that par value be established in the articles.
Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:
a.
A formal plan of merger.
b.
Receipt of voting stock by all stockholders of the original corporations.
c.
An affirmative vote by the holders of a majority of each corporation’s voting shares.
d.
Approval by the board of directors of each corporation.
Choice “b” is correct. A merger can be effected by giving some parties cash or property; not everyone need receive voting shares.
Choice “a” is incorrect. The merger must be pursuant to a formal plan.
Choice “c” is incorrect. An affirmative vote by the holders of each corporation’s voting shares is required.
Choice “d” is incorrect. A plan of merger must be approved by the boards of the merging corporations.
Harry, Betty, and Jim decide to form a hair salon business. Betty and Jim agree to equally manage the business and have agreed to accept full personal liability for obligations of the business. Harry contributes money to help them get started. Harry does not want any personal liability but does want access to the books and records and to share in the profits. They have all agreed that unanimous consent is needed to transfer their ownership interests. Assume any necessary filings have been made. What type of business entity best reflects the terms of their agreement?
The three have formed:
a.
A limited partnership.
b.
A limited liability company.
c.
A general partnership.
d.
A corporation.
Choice “a” is correct. A limited partnership best reflects the terms of the parties’ agreement. A limited partnership has one or more general partners and one or more limited partners. The general partners are personally liable for partnership obligations and run the business (such as Betty and Jim agreed). A limited partner does not have personal liability for partnership obligations and does not take part in management; however, limited partners have a right to inspect partnership books and records relevant to their interest. Thus, a limited partnership has the attributes that Harry agreed to. Finally, all partners must unanimously consent to a transfer of an ownership interest in a limited partnership, as the parties agreed here. Thus, a limited partnership best reflects the agreement of the parties.
Choice “b” is incorrect. Members of a limited liability company are not personally liable for the company’s debt. (They may agree otherwise, but this is not a general attribute of a limited liability company.) Because the facts say Betty and Jim each agreed to have full personal liability, a limited liability company does not best reflect the parties’ agreement.
Choice “c” is incorrect. All partners are personally liable for all obligations of a general partnership. Because the facts say Harry did not accept personal liability, the agreement does not reflect a general partnership.
Choice “d” is incorrect. Corporate shareholders generally are not liable for the corporation’s obligations. (They may agree otherwise, but this is not a basic attribute of a corporation.) As the facts say Betty and Jim share full personal liability, the agreement does not reflect a corporation.
Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter?
I.
Provision for the authorization of voting stock.
II.
Name of the corporation.
a.
I only.
b.
Both I and II.
c.
Neither I nor II.
d.
II only.
Choice “b” is correct. Both I and II.
Rule: In order to obtain a corporate charter, a for-profit corporation must include in its articles of incorporation the name of the corporation and a provision for the authorization of voting stock. In addition, the articles of incorporation must include the names of the incorporators and the name and address of the registered agent.
Choices “a”, “d”, and “c” are incorrect, per the above rule.
The corporate veil is most likely to be pierced and the shareholders held personally liable if:
a.
A partnership incorporates its business solely to limit the liability of its partners.
b.
An ultra vires act has been committed.
c.
The shareholders have commingled their personal funds with those of the corporation.
d.
The corporation has elected S corporation status under the Internal Revenue Code.
Choice “c” is correct. Generally, a corporation is treated as an entity distinct from its shareholders and shareholders are not liable for the corporation’s debts. However, where the shareholders do not treat the corporation as a distinct entity, such as where they commingle their personal funds with the corporation’s funds, courts are likely to ignore the corporate form as well.
Choice “d” is incorrect. An election to be taxed like a partnership under Subchapter S is not grounds to pierce the corporate veil.
Choice “b” is incorrect. An ultra vires act is one beyond the corporation’s powers. The persons who authorized the ultra vires act can be held personally liable for damages caused, but it is not a ground for piercing the corporate veil.
Choice “a” is incorrect. Limiting personal liability is the main reason to incorporate. It is a ground for piercing the corporate veil only if it is done fraudulently (i.e., to avoid paying present creditors).
Absent a specific provision in its articles of incorporation, a corporation’s board of directors has the unilateral power to do all of the following, except:
a.
Repeal the bylaws.
b.
Declare dividends.
c.
Fix compensation of directors.
d.
Amend the articles of incorporation.
Choice “d” is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders.
Choice “a” is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise.
Choice “b” is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor.
Choice “c” is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).
Carr Corp. declared a 7% stock dividend on its common stock. The dividend:
a.
Requires a vote of Carr’s stockholders.
b.
Is includable in the gross income of the recipient taxpayers in the year of receipt.
c.
Has no effect on Carr’s earnings and profits for federal income tax purposes.
d.
Must be registered with the SEC pursuant to the Securities Act of 1933.
Choice “c” is correct. A stock dividend means that the corporation issues its existing shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has no effect on the corporation’s earnings and profits for federal income tax purposes.
Choice “d” is incorrect. There is no requirement that stock dividends be registered with the SEC because no “sale” is involved.
Choice “b” is incorrect. The receipt of a stock dividend is not the recognition of income. It merely divides the stockholders’ current ownership interests into more pieces; it does not increase proportional ownership interest in the corporation.
Choice “a” is incorrect. The issuance of dividends, including stock dividends, is at the directors’ discretion; shareholders do not vote on dividends.
Which of the following rights is a holder of a public corporation’s cumulative preferred stock always entitled to?
a.
Guaranteed dividends.
b.
Dividend carryovers from years in which dividends were not paid, to future years.
c.
Voting rights.
d.
Conversion of the preferred stock into common stock.
Choice “b” is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year.
Choice “d” is incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted.
Choice “c” is incorrect. Preferred stock need not have voting rights.
Choice “a” is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.
Which of the following securities are corporate debt securities?
~~Convertible bonds
~~Debenture bonds
~~Warrants
a.
Yes
Yes
Yes
b.
No
Yes
Yes
c.
Yes
Yes
No
d.
Yes
No
Yes
Choice “c” is correct.
Rules: Bonds are debt securities. Thus, convertible bonds and debenture bonds are debt securities. A warrant is a contractual right to purchase stock, which constitutes a share of corporate equity.
Choices “a”, “d”, and “b” are incorrect, per the above rules.
Under the Revised Model Business Corporation Act, a dissenting stockholder’s appraisal right generally applies to which of the following corporate actions?
~~Short-form Consolidations
~~Mergers
a.
No
No
b.
Yes
No
c.
Yes
Yes
d.
No
Yes
Choice “c” is correct. “Yes-Yes.”
Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.
Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights.
Choices “b”, “d”, and “a” are incorrect, per the above rules.
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders’ derivative suit in the name of the corporation?
a.
To compel payment of a properly declared dividend.
b.
To compel dissolution of the corporation.
c.
To enforce a right to inspect corporate records.
d.
To recover damages from corporate management for an ultra vires management act.
Choice “d” is correct. A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director’s or an officer’s scope of authority and thus is a breach of duty to the corporation.
Choices “a”, “c”, and “b” are incorrect, because these would all be causes of action against the corporate directors or officers on behalf of the stockholder to recover damages or seek some other remedy against the corporate directors or officers on behalf of the stockholder, not on behalf of the corporation.
Under the Revised Model Business Corporation Act, when a corporation’s bylaws grant stockholders preemptive rights, which of the following rights is(are) included in that grant?
~~The right to a proportionate share of corporate assets remaining on corporate dissolution
~~The right to purchase a proportionate share of newly issued stock
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
Rule: Preemptive rights provide a shareholder with a right of first refusal to buy a share of newly issued shares sufficient to maintain the shareholder’s proportionate share of rights in any newly issued shares.
Rule: Preemptive rights do not provide a shareholder with the right to a proportionate share of corporate assets on dissolution.
Choice “c” is correct. “No - Yes.”
Choices “b”, “a”, and “d” are incorrect, per the above rules.
To which of the following rights is a stockholder of a public corporation entitled?
a.
The right to vote for the election of officers.
b.
The right to a reasonable inspection of corporate records.
c.
The right to have the corporation issue a new class of stock.
d.
The right to have annual dividends declared and paid.
Choice “b” is correct. Stockholders have a right to inspect certain corporate records.
Choice “d” is incorrect. Declaration of dividends is within the directors’ discretion. There is no absolute right of shareholders to receive annual dividends.
Choice “a” is incorrect. Officers are appointed by the directors; they are not elected by the shareholders.
Choice “c” is incorrect. Shareholders do not have a right to force the corporation to issue a new class of stock.
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?
a.
The parent corporation’s stockholders must approve the merger.
b.
The subsidiary corporation’s dissenting stockholders must be given an appraisal remedy.
c.
The parent corporation’s dissenting stockholders must be given an appraisal remedy.
d.
The subsidiary corporation’s board of directors must pass a merger resolution.
Choice “b” is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary’s shareholders have a right to dissent and take advantage of the appraisal remedy.
Choice “d” is incorrect. The subsidiary’s board is not required to take any action in a short-form merger.
Choice “a” is incorrect. The parent corporation’s shareholders have no right to approve or disapprove a short-form merger.
Choice “c” is incorrect. The parent corporation’s shareholders have no right to dissent to a short-form merger.
Davis, a director of Active Corp., is entitled to:
a.
Serve on the board of a competing business.
b.
Unilaterally grant a corporate loan to one of Active’s shareholders.
c.
Rely on information provided by a corporate officer.
d.
Take sole advantage of a business opportunity that would benefit Active.
Choice “c” is correct. As a director of the corporation Davis may rely on information provided to him/her by a corporate officer. A corporate director is under no obligation to verify information given to him by management (corporate officers).
Choice “a” is incorrect. A director is not entitled to serve on the board of a competing business. Doing so would be a breach of fiduciary duty.
Choice “d” is incorrect. A director may not take sole advantage of a business opportunity that would benefit the corporation. Doing so would be a breach of fiduciary duty.
Choice “b” is incorrect. A director may not unilaterally grant a corporate loan to one of the corporation’s shareholders. Directors generally must act through a majority vote at a directors’ meeting.
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?
a.
Limited partnership.
b.
Subchapter S corporation.
c.
Joint venture.
d.
Limited liability company.
Explanation
Choice “c” is correct. A joint venture is like a partnership. A partnership or joint venture can be formed without filing any documents with the state.
Choice “a” is incorrect. Formation of a limited partnership requires the filing of a certificate of limited partnership with the state.
Choice “d” is incorrect. A limited liability company may be formed only by filing articles of organization with the state.
Choice “b” is incorrect. A corporation, including a Subchapter S corporation, may be formed only by filing articles of incorporation with the state.
Knox, president of Quick Corp., contracted with Tine Office Supplies, Inc. to supply Quick’s stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick’s board of directors that Knox was a majority stockholder in Tine. Quick’s contract with Tine is:
a.
Valid because the contract is fair to Quick.
b.
Void because the disclosure was made after execution of the contract.
c.
Void because of Knox’s self-dealing.
d.
Valid because of Knox’s full disclosure.
Choice “a” is correct. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders, who then approve the transaction, or the director can prove that the transaction was fair to the corporation. The stationery purchase was fair to Quick, since it was purchased at a below-market price. Thus, the contract is valid.
Choice “c” is incorrect. A director’s self-dealing does not automatically make a contract void. The contract can be upheld if it was fair.
Choice “b” is incorrect. A director’s self-dealing does not automatically make a contract void. The contract can be upheld if it was fair.
Choice “d” is incorrect. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or shareholders, who then approve the transaction, or the director can prove that the transaction was fair. Mere disclosure after the contract was adopted does not automatically render the contract valid.
A stockholder’s right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to:
a.
Obtain stockholder names for a retail mailing list.
b.
Investigate possible management misconduct.
c.
Solicit stockholders to vote for a change in the board of directors.
d.
Commence a stockholder’s derivative suit.
Choice “a” is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder’s interest in the corporation. This right will be denied where the purpose is not reasonably related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose.
Choices “d”, “c”, and “b” are incorrect. The following reasons for shareholders to inspect the books of the corporation are reasonably related to their status as shareholders:
d.
To commence a stockholder’s derivative suit.
c.
To solicit stockholders to vote for a change in the board of directors.
b.
To investigate possible management misconduct.
Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?
a.
Delegation.
b.
Accord and satisfaction.
c.
Assignment.
d.
Novation.
Choice “d” is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations.
Choice “c” is incorrect. An assignment is a transfer of a contractual duty to perform. After the transfer, both the assignor and assignee may be held liable for performance. The assignor is not, thereby, released from liability.
Choice “a” is incorrect. A delegation is a transfer of a contractual duty to perform. Both the delegor and delegee are liable to perform after the assignment; it does not release the promoter from liability.
Choice “b” is incorrect. An accord is an agreement to change the performance due under a contract. Once the new terms are performed or satisfied, the original contract terms are terminated. Such an agreement does not automatically result in release of a promoter.
Which of the following parties is liable to repay an illegal distribution to a corporation?
a.
A director not breaching his or her duty in approving the distribution and the corporation is solvent.
b.
A director not breaching his or her duty in approving the distribution and the corporation is insolvent.
c.
A shareholder not knowing of the illegality of the distribution and the corporation is solvent.
d.
A shareholder knowing of the illegality of the distribution and the corporation is insolvent.
Choice “d” is correct. Illegal dividends from an insolvent company must be repaid to the corporation for the benefit of the creditors. A shareholder who knowingly accepts an illegal dividend is liable to return it.
Choices “a” and “b” are incorrect. If a director does not breach any duties in approving a distribution, the director is protected by the business judgment rule and is not liable for the distribution whether the corporation is solvent or insolvent.
Choice “c” is incorrect. A shareholder of a solvent corporation who unknowingly accepts an illegal distribution is not obligated to repay the distribution.
Which of the following entities does not require the approval of the state in which the entity is formed?
a.
A corporation.
b.
A limited liability partnership.
c.
A general partnership.
d.
A limited liability company.
Choice “c” is correct. Under the common law and the Revised Uniform Partnership Act there is no requirement for a general partnership to file with the state and obtain state approval. All that is necessary to form a general partnership is: (i) an agreement (ii) between at least two competent parties (iii) to carry on as co-owners of a business for profit.
Choices “b”, “d”, and “a” are all incorrect because a limited liability partnership, a limited liability company and a corporation are all required to file with and be approved by the state.
Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, “T.J. Jones for The Ambers.” Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?
a.
It is liable because Jones is not liable.
b.
It is not liable because the corporation was an undisclosed principal.
c.
It is not liable because Jones is liable.
d.
It is liable because Jones had authority to make the contract.
Choice “d” is correct. Where an agent enters into a contract on behalf of a principal and discloses the existence and identity of the principal and acts with authority, the principal is liable and the agent is not liable. Here, Jones signed the contract with an indication that he was signing for the corporation. The president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation’s business. The restaurant repairs here appear to be with the scope of Food Corp.’s business. Therefore, Food Corp. will be bound because Jones had at least apparent authority.
Choice “c” is incorrect, per the rule stated above.
Choice “b” is incorrect. The president signed as acting on behalf of the corporation, thus disclosing the principal.
Choice “a” is incorrect, per the rule stated above.
What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office?
a.
A limited liability company.
b.
A limited partnership.
c.
A general partnership.
d.
A corporation.
Choice “c” is correct. A general partnership may be formed without filing any organizational documents with the state. All that is needed to form a partnership is an agreement between at least two competent persons to carry on as co-owners a business for profit.
Choice “d” is incorrect. In order to form a corporation, a document, called the articles of incorporation in most states, must be filed with the state.
Choice “a” is incorrect. In order to form a limited liability company, a document, called the articles of organization in most states, must be filed with the state.
Choice “b” is incorrect. In order to form a limited partnership, a document, called the “certificate of limited partnership” in most states, must be filed with the state.
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?
a.
Both corporations have the disadvantage of double taxation.
b.
Shareholders can be either citizens of the United States or foreign countries.
c.
Both corporations can have more than 100 shareholders.
d.
Shareholders can contribute property into a corporation without being taxed.
Choice “d” is correct. Either entity’s shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors.
Choice “c” is incorrect. An S corporation may not have more than 100 shareholders, although a C corporation may have as many shareholders as desired.
Choice “a” is incorrect. Only the C corporation is subject to the double taxation disadvantage.
Choice “b” is incorrect. Only an S corporation is prohibited from having foreign country shareholders.
Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?
a.
If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
b.
If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
c.
If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
d.
Because Smith is not a director, the rule does not apply.
Choice “c” is correct. The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages.
Choices “d”, “b”, and “a” are incorrect, per the above rule.
Which of the following statements is correct regarding both debt and common shares of a corporation?
a.
Common shares have a higher priority on liquidation than debt.
b.
Common shares typically have a fixed maturity date, but debt does not.
c.
Common shareholders and debt holders have an ownership interest in the corporation.
d.
Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.
Choice “d” is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation.
Choice “c” is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.
Choice “b” is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.
Choice “a” is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first. After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.
In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof?
a.
Subchapter S corporation.
b.
Subchapter C corporation.
c.
General partnership.
d.
Limited liability company.
Choice “b” is correct. A Subchapter C corporation is taxed as an entity for income tax purposes. Additionally, distributions made to stockholders are treated as taxable income to the stockholders. [Note that this type of corporation is more often called a C corporation instead of a Subchapter C corporation.]
Choice “c” is incorrect. A general partnership is not taxed as a separate entity for income tax purposes.
Choice “d” is incorrect. An LLC is not taxed as a separate entity for income tax purposes unless the LLC specifically elects to be taxed like a corporation. [Of course, the word “always” in the question takes care of that.]
Choice “a” is incorrect. A Subchapter S corporation is taxed as a partnership. Thus, it is not taxed as a separate entity for income tax purposes. [Note that this type of corporation is more often called an S corporation instead of a Subchapter S corporation.]
Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?
a.
An acquisition of stock for debt securities.
b.
A leveraged buyout of assets.
c.
A cash tender offer.
d.
A merger.
Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?
a.
An acquisition of stock for debt securities.
b.
A leveraged buyout of assets.
c.
A cash tender offer.
d.
A merger.
Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?
a.
The director must disclose the interest to the independent members of the board and refrain from voting.
b.
The director must resign from the board of directors.
c.
An independent appraiser must render to the board of directors a fairness opinion on the contract.
d.
The shareholders must review and ratify the contract.
Choice “a” is clearly the best answer here, although it is not completely correct. Directors owe their corporation a duty of loyalty and must act solely in the best interests of the corporation. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders who then approve the transaction, or the transaction is fair. Thus, disclosing the interest to the independent members and refraining from voting is one way to ensure the validity of a contract between a director and his or her corporation, but it technically is not required as disclosure to and approval by the shareholders also ensures validity, as does making sure the transaction is fair to the corporation. Nevertheless, the other choices are clearly incorrect - making this the best choice.
Choice “c” is incorrect. A transaction with an interested director will be upheld if it is fair, but it is not necessary to hire an independent appraiser to prove fairness.
Choice “d” is incorrect. One method of approving a contract with an interested director is to disclose all of the material facts to the shareholders and seek their approval. Merely allowing the shareholders to review the contract is not sufficient.
Choice “b” is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?
a.
A stock dividend causes a decrease in the assets of the corporation.
b.
A stock dividend increases a stockholder’s proportionate share of corporate ownership.
c.
A stock dividend is prohibited in such a corporation.
d.
A stock dividend is a corporation’s ratable distribution of additional shares of stock to its stockholders.
Choice “d” is correct. Stock dividends are dividends in the corporation’s own authorized but unissued shares given to existing shareholders on account of their shares.
Choice “c” is incorrect. Despite the fact that a stock dividend in a corporation with only one class of par value stock does not change a shareholder’s proportional ownership or affect capitalization of the corporation, nothing prohibits a corporation, even a corporation with only one class of par value stock, from declaring a stock dividend.
Choice “b” is incorrect. With a stock dividend, when there is only one class of stock, each shareholder receives a proportionate amount of stock, resulting in each shareholder owning the same percentage of the corporation after the dividend is issued as he or she owned before the dividend was issued.
Choice “a” is incorrect. When a stock dividend is issued in a corporation’s own stock, no assets are distributed and the solvency of the corporation remains the same.
Which of the following corporate actions is subject to shareholder approval?
a.
Removal of officers.
b.
Declaration of cash dividends.
c.
Removal of directors.
d.
Election of officers.
Explanation
Choice “c” is correct. Shareholders have the right to elect and remove directors through the voting process.
Choice “d” is incorrect. Officers are selected by the directors rather than by the shareholders.
Choice “a” is incorrect. Because officers are selected by the directors, generally they may be removed only by the directors.
Choice “b” is incorrect. Dividends generally can be declared only by the directors; shareholders usually do not have any right to declare or vote on a distribution.
Which of the following is a requirement for a small business corporation to elect S corporation status?
a.
It has at least one partnership as a shareholder.
b.
It has more than 75 shareholders.
c.
It has only one class of stock.
d.
It has international ownership.
Choice “c” is correct. A corporation may elect to be taxed like a partnership under Subchapter S only if it has only one class of stock.
Choice “a” is incorrect. A corporation can elect S corporation status only if its shareholders are individuals, estates, or certain types of trusts.
Choice “d” is incorrect. Foreign shareholders generally are prohibited in an S corporation.
Choice “b” is incorrect. An S corporation can have up to 100 shareholders, but it may have fewer.
The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?
a.
Proxy statement.
b.
Bylaws.
c.
Charter.
d.
Certificate of Incorporation.
Choice “b” is correct. The bylaws usually contain the rules for running the corporation.
Choices “d” and “c” are incorrect. These are possible choices, but not as good an answer as “b”. A corporation’s articles of incorporation (called a charter in a few states) must set out certain information relevant to formation of the corporation, but it may include any other information that it is not illegal. However, usually details about intracorporate power are set out in bylaws rather than in the articles or charter.
Choice “a” is incorrect. A proxy statement is a request to shareholders to allow their shares to be voted by a specified person in a specified way. It has nothing to do with a corporate president’s authority.
Which of the following statements best states the purpose of cumulative voting?
a.
To allow for the election of one-third of the board of directors each year.
b.
To allow minority shareholders to gain representation on the board of directors.
c.
To assure that a majority of shares voted elects the entire board of directors.
d.
To assure the continuance of incumbent directors.
Choice “b” is correct. In cumulative voting, each share is entitled to one vote for each director position that is being filled and the shareholders may cast the votes in any way, including casting all for a single candidate. This helps minority shareholders gain representation on the board. Thus, choice “c” is incorrect.
Choice “d” is incorrect. Cumulative voting does not insure the continuance of incumbent directors.
Choice “a” is incorrect. Staggering election of the board into three classes (rather than cumulative voting) would facilitate the election of 1/3 of the board each year.
Which of the following forms of business generally provides all owners with limited liability while avoiding federal taxation of income at the entity level?
a.
Subchapter C corporation.
b.
Limited partnership.
c.
Subchapter S corporation.
d.
Partnership.
Choice “c” is correct. In a subchapter S corporation the entity is taxed liked a partnership, but the shareholders still enjoy the limited liability of the corporate form.
Choice “a” is incorrect because a C corporation is taxed at the federal level.
Choice “d” is incorrect because a general partner in a partnership has unlimited liability.
Choice “b” is incorrect because a general partner in a limited partnership also has unlimited liability.
Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution?
a.
Property dividends.
b.
Liquidating dividends.
c.
Cash dividends.
d.
Stock dividends.
Choice “d” is correct because, technically, dividends paid in stock are not a distribution. Stock dividends are dividends in the corporation’s own authorized but unissued shares. No assets are distributed. The stockholder’s wealth and percentage of ownership are not increased. A stock dividend has no affect on earnings and profits for federal income tax purposes.
Choice “c” is incorrect because a cash dividend is obviously a distribution.
Choice “a” is incorrect. A property dividend is a distribution of earnings in the form of property.
Choice “b” is incorrect. A liquidating dividend is a dividend that is paid by the corporation to shareholders from capital rather than retained earnings. As such, it is clearly a distribution.
What is the most likely effect if a court pierces the corporate veil?
a.
The corporation can lose its tax exempt status.
b.
The corporation’s shareholders, officers, and directors can be assigned liability.
c.
The corporation can be held liable for acts of the directors.
d.
The corporation can be held liable for acts of nonofficer employees of the corporation.
Choice “b” is correct. When the “corporate veil is pierced,” courts disregard the corporate form and hold shareholders, officers or directors personally liable. Courts generally will pierce the corporate veil for commingling of funds, inadequate capitalization at time of formation or fraud.
Choice “c” is incorrect. “Piercing the corporate veil” does not entail holding a corporation liable for the acts of directors; it entails holding a shareholder, officer or director liable for obligations of the corporation.
Choice “a” is incorrect because “piercing the corporate veil” does not entail a corporation losing tax-exempt status.
Choice “d” is incorrect because “piercing the corporate veil” does not entail holding a corporation liable for the acts of nonofficer employees; it entails holding a shareholder, officer or director liable for obligations of the corporation.
Eaton is the sole owner of a construction company. Eaton is concerned about personal liability. Which of the following entities will best allow Eaton to limit personal liability?
a.
Sole proprietorship.
b.
General partnership.
c.
Limited partnership.
d.
C corporation.
Choice “d” is correct. One of the main advantages of a corporation is that stockholders, directors and officers generally are not personally liable for the obligations of the corporation. Generally, only the corporation itself can be held liable.
Choice “a” is incorrect because a sole proprietor is personally liable for all obligations of the business.
Choice “b” is incorrect because all general partners have unlimited personal liability. Additionally, Eaton could not be the sole owner in a general partnership; he would have to share ownership with other partners.
Choice “c” is incorrect because in a limited partnership there must be at least one limited and one general partner. The general partner in a limited partnership has unlimited liability. Eaton would not choose to be a limited partner because then Eaton would have no right to manage and control the business; he would have to give up control to a general partner.
Which of the following circumstances may permit the piercing of the corporate veil of a closely held corporation and thus may cause its shareholders to be held personally liable?
I.
The corporation is thinly capitalized at the time of formation.
II.
The corporation borrows money from a shareholder without giving the shareholder a security interest in corporate assets.
a.
Neither I nor II.
b.
Both I and II.
c.
II only.
d.
I only.
Choice “d” is correct. I is a correct statement. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the corporation was inadequately (thinly) capitalized at the time of its formation. II, however, is incorrect. A corporation borrowing money from a shareholder and not giving the shareholder security is not a ground for piercing the corporate veil.
Choices “c”, “b”, and “a” are incorrect because I, and only I, is a correct statement.
Which of the following acts is most likely to cause a court to pierce the corporate veil?
a.
Using corporate assets for the owner’s personal purposes.
b.
Retention of excess capital.
c.
Failure to designate a registered agent in the articles of incorporation (Charter).
d.
Failure to conduct a significant portion of business in the chartering state.
Choice “a” is correct. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the shareholder commingles personal assets with his own. This includes using corporate assets to pay personal debts.
Choice “c” is incorrect. Failure to designate a registered agent in the articles makes the articles faulty in most states and is a ground for seeking dissolution of the corporation, but in and of itself, it is not a ground for piercing the corporate veil to reach shareholders’ personal assets to satisfy corporate obligations.
Choice “b” is incorrect. Retention of excess capital may be a ground for imposing extra taxes on the corporation, but it is not a ground for piercing the corporate veil.
Choice “d” is incorrect. Failure to conduct a significant portion of business in the chartering state has absolutely no impact on corporate obligations. Many corporations are incorporated in states with favorable tax structures and corporate laws (e.g., Delaware) even though they carry on little or no business in the state of incorporation.
Hughes and Brody start a business as a closely-held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm?
a.
Inspection rights.
b.
Pre-emptive rights.
c.
Cumulative voting rights.
d.
Shareholder derivative rights.
Choice “b” is correct. The right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a pre-emptive right.
Choice “d” is incorrect. A shareholder’s derivative right is the right of a shareholder to enforce a legal obligation, for example, by filing a lawsuit, owed to the corporation by a third party when the corporation does not seek to vindicate its own rights.
Choice “c” is incorrect. Cumulative voting rights refers to the right of a shareholder to cast votes in the election of directors equal to the product of the number of shares the shareholder owns times the number of directors being elected (e.g., if a shareholder owns 100 shares and three directors are being elected, the shareholder may cast 300 votes). Cumulative voting is often used to help assure representation of minority shareholders.
Choice “a” is incorrect. A shareholder’s inspection rights refer to the right of a shareholder to inspect and copy certain shareholder records (e.g., minutes of shareholder meetings, list of shareholders, etc.).
