Sample Multiple-Choice Final Exam
Business Organizations - Fall 2014
Professor Palmiter
*****
Instructions [these are the instructions that will appear on the final exam]
You will have 120 minutes to complete the 40 questions of the multiple-choice portion of
the final exam. Remember that TWEN allows you to skip a question and return to it
later, or to change your answer to a previous question.
Unless the question says otherwise, assume the issue arises in a jurisdiction using the
Revised Uniform Partnership Act (1997), the Revised Uniform Limited Liability
Company Act (1996) and the Model Business Corporation Act – all as found on the
course website.
You may not consult anyone during the final exam period about these multiple-choice
questions. The final exam period begins on Monday, December 8 at 9:00AM and ends
Friday, December 19 at 5:00PM
During this exam, you may refer to your class notes and course materials (the casebook
and materials posted on the course website), but you may not conduct additional research.
Sometimes more than one answer is plausible; choose the best answer.
***
This is a 24-question sample exam. It is meant to give you a sense for the types of
multiple-choice questions you can expect on the final exam.
Module I - Fundamentals
1. The following is an example of a penalty default rule (one that one or both of the
parties are likely to want to provide otherwise) ...
A. an employee, as agent of the employer, shall inform the employer of relevant
information
B. an employee may not compete with his employer during the term of employment,
but may compete following employment
C. an employment relationship shall be at will and terminable by either party at any
time, unless agreed otherwise
D. an employer may not, under the US Constitution, treat employees as indentured
servants
2. The board of directors of XYZ Inc. approves a $50 million expenditure for the
company to sponsor a PBS program on "Earth: The Next Century." A is the show's
producer; he is also married to B, the CEO of XYZ. Identify the strongest theory for
a shareholder of XYZ to challenge the expenditure.
A. the directors violated a duty of care, because spending $50 million to sponsor a
show unrelated to the business of XYZ is grossly negligent
B. the $50 million expenditure constituted corporate waste, because the directors
made no attempt to identify the show’s value to the business of XYZ
C. the directors acted in violation of their duty of obedience, since XY’s articles and
bylaws did not authorize support of non-profit organizations
D. the directors violated a duty of loyalty because A and B are married, raising into
question the fairness of the expenditure
Module II – Corporation in Society
3. Identify the statement about US corporate law history which is true:
A. US corporations, unlike their British counterparts, were from the beginning used
for business and industry with large capital needs -- water works, roads, banks
B. Delaware was the first state to adopt a general incorporation statute, which
permitted business corporations to be formed without special legislation
C. the federal securities laws, which mostly deal with disclosure to investors, were
enacted in the 1930s in response to perceived weaknesses in state law
D. the Sarbanes-Oxley Act of 2002 creates the possibility of forming a publiclytraded corporation under a federal incorporation regime
4. The non-shareholder constituency statutes are the 1970s brainchild of corporate
reformers, but widely instituted at the insistence of incumbent corporate management
during the takeover wave of the 1980s. Generally, the statutes …
A. create enforceable rights in employees, creditors, suppliers and communities to
prevent corporate directors from seeking to maximize shareholder interests
B. are without legal effect, since they only permit directors to consider nonshareholder constituents instead of shareholders
C. have been held unconstitutional since they protect local economic interests at the
expense of interstate interests in the free marketability of corporations
D. provide an argument that directors have leeway in constructing antitakeover
measures, even though shareholder interests may be harmed
5. The Supreme Court's decision in Citizens United ...
A. reversed a century of election law and permits all corporations – including
corporations outside the United States – to spend without limit in US elections
B. overturned a federal ban on independent political expenditures by corporations
and unions, thus opening the door to corporate contributions to SuperPACs
C. overturned a state law prohibiting corporate expenditures on referenda, unless the
referendum raises matters related to the corporation's business
D. upheld a state ban on independent political expenditures by for-profit corporations
as a threat to the perception of fairness in electoral process
Module III – Corporate Form
6. A, B, and C are partners in ABC partnership. Their relationship breaks down. A
wants out. She can accomplish this by -A. selling her partnership interest to partner B, even without partner C's consent
B. stating she is withdrawing, thus dissolving the partnership and forcing B and C to
liquidate the business and pay her share to her in cash
C. selling her partnership interest to stranger D, assuming partner C's consent (thus
obtaining the approval of a majority of the partners)
D. merging the partnership into ABC Corporation and then selling her shares on the
open market
7. Which of the following statements is not true?
A. in a limited liability partnership, partners are not personally liable for the
commercial obligations of the business
B. in a limited partnership, limited partners cannot participate in the management of
the partnership (ie, writing checks) without incurring personal liability
C. in a close corporation, the shareholders lack a readily-available market into which
they can sell their shares
D. in a publicly-traded corporation, the shareholders can redeem their shares by
selling them to the corporation on public stock markets
8. Three friends D, E and F agree to go into business installing home insulation. They
agree to share profits and properly register their partnership as HomeInsulate LLP.
Despite opposition by D and E, F signs a contract to undertake an insulation project
for a shopping center, a type of commercial project the business has never undertaken
before. When the project falters and the shopping center sues, who is liable?
A. only the partnership, because it is an LLP in which the partners have limited
liability and F was acting with apparent authority
B. only F, because he signed the contract and lacked authority to bind the partnership
given that the partnership name limits the business to residential projects
C. all three partners D, E and F, because the act of any one partner binds the
partnership and all partners share jointly and severally in partnership liability
D. nobody (neither the partnership nor the partners) because F acted without actual
authority in signing a contract beyond the partnership’s usual business
9. DEF Corp. has a board of five directors. The company president learns of a chance to
acquire a related business and wants the board to consider and approve the deal. The
president sends a notice to the directors of a special meeting to happen in three days,
but not to director D for whom the corporation has no address. The meeting is
attended by three directors (but not D), two of them by Skype. The three at the
meeting all approve the acquisition. Is their action valid?
A. yes – notice was sufficient since it went to a majority of the board at least two
days before the meeting date
B. yes – the quorum at a special meeting, unlike a regular meeting, is one-third of the
board
C. no – notice must be sent to each director, and the failure to send a notice to D
invalidates the meeting
D. no – a board meeting must be in person, unless the articles or bylaws specifically
allow electronic or telephonic presence of directors at meetings
10. GHI Corporation has a six-person board. At a regular board meeting, only two
directors can attend. They then call directors Alice and Bob and put them on a
conference call. The four talk about the corporation buying Blackacre and then agree
to a resolution for GHI to buy Blackacre from Third Party.
A.
B.
C.
D.
the purchase is authorized since four of six is a board majority
the purchase is authorized, assuming the GHI bylaws permit conference calls
the purchase is not authorized, since there was no quorum at the board meeting
the purchase is not authorized, since real estate transactions require shareholder
approval
11. A person who purports to act on behalf of a corporation (a promoter) and who enters
into a contract with a third party when the corporation does not yet exist ...
A. is personally liable on the contract, regardless of the promoter's knowledge of the
incorporation defect
B. is not personally liable, provided the promoter incorporates the business within 90
days after the contract was entered into
C. is personally liable on the contract, provided the promoter knew the corporation
did not yet exist
D. is not personally liable, provided the third party believed it was dealing with a
corporation, regardless of the promoter's knowledge
Module IV – Corporate Finance
12. Valuation of a business under modern valuation methods is based on …
A. the present value of the company’s future net income, taking into account
depreciation and payments to insiders of de facto distributions
B. the company’s expected future cash flows, discounted to reflect the risk of the
company and the inherent time value of money
C. the par value of the company’s shares, which are set by the board of directors
when issuing equity securities
D. the opinion of experts, such as investment banking firms, looking at such factors
as the company’s past earnings, market price of its shares, and asset value
13. XYZ Corporation has 1,000,000 authorized voting shares, of which 400,000 are
outstanding. The XYZ board concludes the corporation needs more capital and wants
to issue another 500,000 voting shares. The board adopts a resolution to this effect.
What more is necessary?
A. a vote of an absolute majority of the outstanding voting shares (200,001 shares) at
a shareholders' meeting
B. a vote of a simple majority of the shares present at a properly-convened
shareholders' meeting, assuming a proper quorum
C. a vote of at least one shareholder, since a plurality is enough
D. the board resolution is sufficient; the board of directors has the authority to
approve the issuance of authorized shares, without a shareholder vote
Module V – Corporate Externalities
14. When a business owner sets up multiple corporations so that the assets of each are
separated from the risks of the others, this use of limited liability ...
A. is consistent with public policy, so long as the corporations comply with
applicable insurance requirements and the owner doesn’t siphon personal funds
B. violates public policy, because all the risks of a business are part of the same
enterprise and must be supported by enterprise assets
C. violates public policy, because corporate law essentially creates an insurance
mandate that business use its assets to insure against business risks
D. is consistent with public policy, since the legislature created limited liability to
encourage business formation regardless of social costs
15. A, B and C are equal shareholders of RentEquip, Inc. C manages the business; A and
B do not actively participate. There are no shareholder or board meetings, and A and
B receive no information from C – though they receive sizable monthly “dividend”
checks. C hires E, who rents to V a defective chainsaw. Ouch! When V sues
RentEquip for her injuries, A and B discover the company’s insurance policy has
lapsed because C had not paid the premiums, despite C’s assurances to them that the
premiums had been paid. RentEquip has insufficient assets to pay V’s judgment.
Who is liable to V?
A. A and B are not liable because they did not dominate the corporation or commit a
wrong given their ignorance of the corporation’s precarious financial situation
B. C is liable because he is responsible for the business being under-insured, thus
justifying piercing the corporate veil
C. A, B and C are liable because the corporation failed corporate formalities, which
by statute results in piercing the corporate veil
D. C is not liable because the tort in this case was committed by E, who rented a
defective item to V
16. In United States v. Bestfoods, the US Supreme Court held that corporate parents are
liable for ...
A. the environmental obligations of their wholly-owned subsidiaries, to further the
deterrent and remedial purposes of the environmental laws
B. the CERCLA obligations of their wholly-owned subsidiaries, if the parent's
executives directed the environmental operations of the sub
C. the CELCLA obligations of their wholly-owned subsidiaries, if the parent would
be derivatively liable under piercing statutes laid out in the federal statute
D. the CERCLA obligations of their wholly-owned subsidiaries, if the parent had
failed to oversee environmental compliance by the sub
Module VI – Corporate Governance
17. B owns 50 shares of XYZ Corp. (described in the previous question 11). On January
15, B sends the corporate secretary a written, signed proxy that states that his shares
are to be voted against the charter amendment. But B then attends the meeting and,
at the appropriate time, votes his shares for the amendment. The 50 shares should be
counted as …
A. being voted against the amendment, because B was holder of the shares on the
record date and properly executed a proxy for the amendment
B. being voted against the amendment, because a written proxy is irrevocable since it
was accompanied by an interest
C. being voted for the amendment, because B properly rescinded his earlier by proxy
by voting his shares in person at the meeting
D. not being voted at the meeting, but treated as abstentions because of the
inconsistency between the proxy and in-person votes
18. Publicly-traded XYZ Corporation is planning to acquire privately-held ABC Inc. by
issuing 10% of its shares for all the shares of ABC. The board of ABC demands the
acquisition be structured so shareholders of ABC will have voting rights and appraisal
rights. Which transaction will not accomplish this objective?
A.
B.
C.
D.
statutory merger
triangular merger (in which ABC is the survivor)
sale of all of ABC’s assets
tender offer
19. L, M, and N are equal shareholders of LMN, Inc., a closely held corporation. All
three are directors, but only L and M are corporate officers with salaries from the
corporation. When N complains that the corporation has failed to pay dividends and
“left him in the cold,” L and M tell him to “take a hike – or sell your shares to us for
$35/share.” N is furious, convinced his shares are worth much more than $35. He
asks for the corporation’s full financial records and any documents related to
indications by outside parties of an interest in buying in the business or its shares.
A. N has a right to inspect these documents because he is a 10% shareholder
B. N has a right to inspect these documents because he is a shareholder, and seeking
to value the business and his shares is a proper purpose
C. N does not have the right to inspect these documents because as a non-officer
shareholder he may only request to see the articles, bylaws and board minutes
D. N does not have a right to inspect these documents as a shareholder, but only as a
director
Module VII – Fiduciary Duties
20. Smith v. Van Gorkom continues to baffle corporate law scholars and practitioners.
Which statement is not a continuing part of the puzzle?
A. The court imposed personal liability on directors who acted in good faith and who
had quite a bit of knowledge about the corporation’s “value”
B. In subsequent cases when directors failed to inform themselves in situations not
involved conflicts of interest, the Delaware courts have been more deferential
C. The case led Congress to enact the Sarbanes-Oxley Act, requiring that boards of
public corporations include a majority of directors with financial expertise
D. Event studies show that after the 1985 decision the financial markets did not
change their valuations of Delaware-incorporated business firms
21. According to the Delaware Supreme Court in Benihana of Tokyo, Inc. v. Benihana,
Inc., the director in the case who provided financing to the corporation...
A. violated his duty of loyalty, even though informed, disinterested and independent
directors approved the financing deal
B. violated his duty of good faith, because he consciously disregarded his duty not to
deal with the corporation
C. did not violate his duty of loyalty, because informed, disinterested and
independent directors determined the transaction to be fair
D. did not violate his duty of good faith, because Delaware’s exculpation statute
requires a showing of illegality
22. A corporate executive does not usurp a corporate opportunity if …
A. the corporation has an expectancy in the opportunity and it is rejected by the
corporation's informed, disinterested and independent decision makers
B. the corporation has an expectancy in the opportunity and the fiduciary takes it
without offering it to the corporation
C. the opportunity is within the corporation's line of business and the corporation had
the financial means to take the opportunity for itself
D. the opportunity is one that the corporation sells to the corporate fiduciary at a fair
price, based on independent market valuations
Module X – Close Corporations
23. Assume that Corporation XYZ has three shareholders, with X holding 20% of the
voting shares, Y holding 25%, and Z holding 55%. The XYZ board is composed of 5
directors. Which statement is true:
A. under straight voting, X and Y are each assured of electing one director to the
five-person board
B. under plurality voting, Z will be able to elect all the XYZ directors, and poor X
and Y (even if they got together) can do nothing about it
C. under cumulative voting, Z is assured of electing all four directors to the board
D. under class voting, X will be able to name one director, Y will be able to name
one director, and Z will name two directors
24. L, M and N are the only (and equal) shareholders in closely-held LMN Corp. From
the beginning of their business ten years ago, L and M were the company’s only
directors and officers, distributing the company’s annual profits as dividends. Last
year L and M decided to discontinue paying dividends. When N complains, L and M
say they are retaining profits for expansion plans. N consults you and asks, “If I sue,
would a claim seeking payment of dividends be successful?”
A. Yes. Shareholders in a close corporation have a right to an equal share of profits,
just like partner in a partnership (who can always seek an accounting)
B. Yes. Shareholders in a close corporation can enforce their reasonable
expectations, here to payment of dividends, by bringing a fiduciary claim
C. No. Dividends need not be paid if the majority has legitimate business purposes
for not paying them, here because of expansion plans
D. No. Dividends need not be paid, even when funds are available and the majority
is acting opportunistically to force the minority to sell his shares to them
Answer Key
1. B
2. D
3. C
4. D
5. B
6. B
7. D
8. A
9. C
10. A
11. C
12. B
13. D
14. A
15. A
16. B
17. C
18. D
19. B
20. C
21. C
22. A
23. B
24. C
If you are still unclear about a question after reviewing the correct answer, please feel
free to contact Michael Klotz (the TA for this course) at klotzmm@wfu.edu.