REG 23 - Business Structure 2 - Authority Flashcards Preview

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Flashcards in REG 23 - Business Structure 2 - Authority Deck (14):

Mary buys an interest in the ABC accounting firm and thereby joins Adam, Betty, and Chen as an equal one-fourth partner. Mary thinks the firm's prices are a little high. When an acquaintance consults Mary about having the firm do her personal income tax return, Mary tells her: "Just come over to my house this weekend. I'll do the return for you and charge you only half of what my firm would charge." Which partnership duty, if any, has Mary breached?
A. Duty of care.
B. Duty of loyalty in the form of no competition
C. Duty of loyalty in the form of no disclosure of confidential information.
D. All of the above.

B. By taking this potential client away from the business, Mary has breached the duty of loyalty by competing with the firm.


A corporate stockholder is entitled to which of the following rights?
A. To elect officers.
B. Receive annual dividends.
C. Approve dissolution.
D. Prevent corporate borrowing.

C. A shareholder does have this right. Unless there is a court order bringing about involuntary dissolution, shareholders will vote on the proposal.


Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to
I. Partnership property.
II. Partnership distributions.

I. No, II. Yes
Partners cannot assign their rights to use partnership assets or management rights to anyone without the unanimous consent of other partners. The only thing that may be assigned without this consent is a partner's right to the distribution of profits.


Under the Uniform Partnership Act, which of the following statements is (are) correct regarding the effect of the assignment of an interest in a general partnership?
I. The assignee is personally responsible for the assigning partner's share of past and future partnership debts.
II. The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.

II only. The assignee of a partnership interest gains the rights to the assigning partner's share of profits upon distribution and assets upon dissolution.
The assignee does not gain any other rights, such as the right to vote or the right to use partnership property for partnership purposes.


Slinger, Hurl, and Macomb are partners in a small real estate business. The three partners discuss whether to purchase a vacant strip mall and attempt to renovate it. Slinger and Macomb vote against, because the partnership already owns a strip mall across the highway from this one, so the purchase does not occur. However, a week later, Hurl purchases the land in his own name.

Which of the following is true?

A. Hurl has wrongfully misappropriated a partnership business opportunity.
B. Hurl has wrongfully gone into competition with the partnership.
C. A and B.
D. Hurl has not breached any duty to the partnership.

B. This was an opportunity that the partnership knowingly passed on. Therefore, it would have been fine for Hurl to purchase it, except for the fact that, given the circumstances, it put Hurl in competition with the partnership and, therefore, breached his fiduciary duty to it.


Sam is a member of a member-managed LLC. The other partners have agreed to make Sam the sole manager of the firm. Sam is worried about his liability, should he make any mistakes. Which protections would not be proper for Sam to ask the other members to approve?
A. A provision in the operating agreement that specifies that it is permissible for Sam to contract to buy paper products from his wife's stationery store, so long as he does so at the same price paid by other customers.
B. A provision in the operating agreement providing that Sam cannot be liable to the firm or to other members for his carelessness, unless it rises to the level of, at least, recklessness.
C. A provision in the operating agreement indicating that Sam is not liable to the firm for money damages resulting from his knowing violation of the law.
D. All of the above (would not be proper).

C. This provision would be improper, because it is manifestly unreasonable to eliminate a manager's liability for intentional violation of criminal law, intentional infliction of harm on the firm, or intentional violation of criminal law.


For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholder's derivative suit in the name of the corporation?
A. To compel payment of a properly declared dividend.
B. To enforce a right to inspect corporate records.
C. To compel dissolution of the corporation.
D. To recover damages from corporate management for an ultra vires management act.

D. Shareholders can sue the corporation and its officers and directors for injuries done to them individually. Shareholders may also file derivative lawsuits against persons who have injured the corporation. A shareholder's derivative suit is so named because the shareholder is not suing for an individual injury done to him/her but, instead, for an injury done to the corporation. The shareholder stands in the proverbial shoes of the corporation to bring an action to remedy an injury done to it. A shareholder who sued to force payment of dividends, to enforce a right to inspect records, or to compel dissolution, would most likely be suing to redress an injury done to him/her individually. Such an injury is remedied through an individual lawsuit brought on the shareholder's own behalf, not a derivative lawsuit brought on the corporation's behalf. This is why Choices A, B, and C are not correct. However, an ultra vires act would likely injure the corporation itself, which is why it is the most logical candidate for a derivative suit and why Choice D is the best answer.


T/F: ABC Corp. was having great financial difficulty. Its CEO, Abar, had engaged in some speculative transactions that had lost substantial money. Bob joined the board of directors and immediately hired an auditor to determine ABC's true financial condition and to investigate whether Abar was still engaged in the improper transactions. The auditor issued a report clearing Abar of wrongdoing.
Unfortunately it turned out that Abar was cleverer than the auditor was; he had continued to engage in the illicit transactions, but had been able to hide them. ABC went broke and a lawsuit was filed claiming that Bob had breached his duty of attention. This claim will probably fail.



T/F: Alix and Sim are partners. Alix is diagnosed with incurable cancer, but not informed by her family doctor. Sim, who learned about the diagnosis, approaches Alix and says: "Of course you'll get well eventually, but this has gotten me thinking. Here, sign this. It's an agreement that if I die first, all my interest in the partnership goes to you and if you die first, all your interest goes to me." Alix signed, but soon learned of her cancer and sought to overturn the agreement. She will succeed.

Alix's diagnosis occurred prior to the written agreement and therefore is possible to overturn the agreement.


T/F: Many years ago, the Chicago Cubs were the only major league baseball team without lights at their park. Therefore, the Cubs could not play night games. Shareholders in the corporation that owned the Cubs sued the board of directors over their refusal to put in lights. Plaintiffs claimed that the board was dominated by the majority owner of the Cubs, Wrigley, who was personally opposed to night baseball.
The directors pointed out that night baseball would be detrimental to the neighborhood in which the park was located and that if the neighborhood deteriorated, fans would be reluctant to go to the games. The business judgment rule will probably protect the board's decision.



The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as
A. The "clean hands doctrine."
B. The "full-disclosure rule."
C. The "responsible person doctrine."
D. The "business-judgment rule."

D. Under the business-judgment rule, courts refuse to second guess the decisions of corporate directors (and officers) in most situations, because the judges realize that they themselves are not business experts. There are some recognized exceptions to the business-judgment rule, particularly where the corporate managers were in a conflict-of-interest situation when they acted.


In the absence of a specific provision in its articles of incorporation, a corporation's Board of Directors has the power to do all of the following, except
A. Repeal the bylaws.
B. Declare dividends.
C. Fix the compensation of directors.
D. Amend the articles of incorporation.

D. Amending the Articles is a major step and is beyond the powers of the directors. Shareholders must approve such a change.


Which of the following statements is (are) usually correct regarding general partners' liability?
I. All general partners are jointly and severally liable for partnership torts.

II. All general partners are liable only for those partnership obligations they actually authorized.

I only. General partners are jointly and severally liable, or potentially liable, for an entire tort judgment against their firm. Their liability extends beyond acts they authorized. Even unauthorized acts can create liability for the general partners.


T/F: Millie and Molly were partners in a pizza delivery business. One day Millie's personal car was in the repair shop, so she borrowed one of the partnership's pizza delivery trucks to take her daughter to soccer practice. On the way home from practice, Millie carelessly caused an accident, injuring Paul. Paul sued the partnership. He will probably succeed.

Because this is an act outside of the ordinary course of business, Millie would be the responsible party and the partnership would not be liable.

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