BLTS-10E PRACTICE QUIZ
CHAPTER 30:
CORPORATE DIRECTORS, OFFICERS, AND
SHAREHOLDERS
1. Generally, to qualify to sit on a corporate board of directors, a person must:
a.
b.
c.
d.
Meet minimum age and residency requirements.
Be a shareholder of the corporation.
Meet few legal requirements.
Be an employee of the corporation.
ANS:
a. Incorrect. Only a handful of states impose these requirements.
b. Incorrect. A director may be a shareholder, but this is not a necessary
qualification--unless statutory provision of corporate articles or bylaws
include this requirement.
c. Correct. Few legal requirements exist concerning directors’ qualifications.
d. Incorrect. This is normally not required to be a corporate director.
2. The best definition of a quorum is which of the following?
a. A quorum is 51 percent of all shareholders.
b. A quorum is 66 percent of all directors.
c. A quorum is the minimum number of members of a decision-making body
that must be present before business may be transacted.
d. A quorum is the number of voters who must agree to a revision before
corporate bylaws may be changed or otherwise amended.
ANS:
a. Incorrect. A quorum is the minimum number of members of a decisionmaking body that must be present before business may be transacted.
b. Incorrect. A quorum is the minimum number of members of a decisionmaking body that must be present before business may be transacted.
c. Correct. This is the best definition of a quorum among those listed here.
d. Incorrect. Because of the restrictions in this definition, it is not the best
definition. A quorum is the number of decision makers needed to transact
business generally, not just when bylaws are amended or changed.
3. The board of directors does not have responsibility over which of the following
areas?
a. Financial decisions such as issuing shares of stock or bond.
b. The appointment, supervision, and removal of corporate officers.
c. The appointment, supervision, and removal of all corporate employees.
d. The declaration and payment of corporate dividends.
ANS:
a. Incorrect. This is one of the general areas in which directors exercise
responsibility.
b. Incorrect. This is one of the general areas in which directors do exercise
responsibility. Directors select the president or chief executive officer of a
company, for example.
c. Correct. Ordinary and daily corporate affairs, such as hiring and firing
employees who are non-officers, are the responsibility of corporate
officers, not the board of directors.
d. Incorrect. Directors do decide if and when to issue corporate dividends.
4. The duty of loyalty that directors and officers owe to the corporation involves:
a. The duty of directors and officers to act in their own best interests.
b. The duty of directors and officers to subordinate their personal interests to
the welfare of the corporation.
c. The duty of directors and officers to use available funds to pay themselves
before paying the corporation’s debts.
d. Overseeing the activities of employees during their daily work.
ANS:
a. Incorrect. Directors and officers must not put their personal interests
ahead of the interests of the corporations or they violate their duty of
loyalty.
b. Correct. Directors and officers must subordinate their personal interests to
the welfare of the corporation.
c. Incorrect. The duty of loyalty requires directors and officers to subordinate
their personal interests to the welfare of the corporation. Thus, when cash
becomes available to pay a corporation’s debts, directors or officers who
uses this cash to pay themselves before paying the corporation have
usurped a corporate opportunity.
d. Incorrect. This is a duty owed by officers, but it is part of the duty of care,
not the duty of loyalty.
5. 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?
a. Nothing. This is fine.
b. Make full disclosure of his interest to the other board members and
abstain from voting on the matter.
c. Never enter into a contract like this.
d. Resign from the board if the contract is signed.
ANS:
a. Incorrect. Mark should make full disclosure of the contract.
b. Correct. Mark needs to make full disclosure and abstain from voting on the
issue to avoid a potential conflict of interest.
c. Incorrect. Mark may enter the contract under the appropriate conditions.
d. Incorrect. If Mark makes full disclosure and abstains from voting, he need
not resign.
6. Which of the following is a major power held by shareholders?
a.
b.
c.
d.
ANS:
a.
b.
c.
d.
The power to appoint corporate officers.
The power to manage and supervise daily operations of the corporation.
The power to declare dividends.
The power to amend articles of incorporation or bylaws.
Incorrect. This is a power held by the directors.
Incorrect. This is a power held by the officers.
Incorrect. This is a power held by the directors.
Correct. Shareholders vote to amend articles of incorporation or the
corporate bylaws.
7. 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:
a.
b.
c.
d.
A preemptive right.
A proxy right.
A warrant agreement.
An attachment right.
ANS:
a. Correct. This describes a preemptive right--the right of current shareholder
to buy newly issued shares before anyone else.
b. Incorrect. A proxy right is associated with voting rights of shareholders.
c. Incorrect. There is no "warrant agreement."
d. Incorrect. An attachment refers to the ability of a court to seize persons or
property; it is a term used in debtor-creditor relations.
8. When an insolvent corporation pays a dividend to its shareholders:
a. The dividend is illegal, and the shareholders may be liable for returning it
to the corporation or its creditors.
b. The dividend is referred to as a stock warrant.
c. The shareholders are always entitled to retain the dividend.
d. The dividend is referred to as watered stock.
ANS:
a. Correct. In this situation, the shareholders may be liable for returning the
illegal dividend to the corporation or its creditors.
b. Incorrect. Such a dividend is called an illegal dividend.
c. Incorrect. In this situation, the shareholders may be liable for returning the
illegal dividend to the corporation or its creditors.
d. Incorrect. Such a dividend is not referred to as watered stock.
9. When a corporation suffers a wrong and the corporate directors fail to take
action to redress that wrong, one effective and appropriate way to obtain redress
is through:
a.
b.
c.
d.
The issuance of preemptive rights.
The use of stock warrants.
A shareholder's derivative suit.
Shareholders voting in new officers.
ANS:
a. Incorrect. This would not be an effective way to address such harms.
b. Incorrect. This would also not be an effective way to address such harms.
c. Correct. A suit brought by a shareholder to enforce a cause of action the
corporation has against a third person, such as an officer or directors,
would be an appropriate and effective way to address such harms.
d. Incorrect. Shareholders may not vote in new officers.
10. The liability of shareholders is:
a.
b.
c.
d.
Unlimited.
Just like that of partners.
Limited to their investment in the stock.
Limited to a maximum of $50,000.
ANS:
a. Incorrect. Shareholders' liability is limited to the amount they invest in
stock.
b. Incorrect. Partners have unlimited personal liability, but shareholders do
not.
c. Correct. The liability of shareholders is limited to the amount of money that
they invested in the corporation’s stock.
d. Incorrect. There is no upper (or lower) limit on the dollar amount of
shareholders' liability.