BLT&E-7e: Practice Quiz
Chapter 31:
Management and Ownership of a Corporation
1.
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.
Answers:
a. Incorrect. For any given corporation, this percentage of all
shareholders may constitute a quorum SOME of the time.
b. Incorrect. For any given corporation, this percentage of shareholders
may constitute a quorum SOME of the time, for SOME decisions.
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.
2.
The fiduciary duties of directors and of corporate officers include the duty
of loyalty and:
a. the duty to tender.
b. the duty of care.
c. the duty of revision.
d. the duty of derivation.
Answers:
a. Incorrect. The directors and officers have no duty to “tender.”
b. Correct. Directors and officers have a duty of care, which includes a
duty to make informed and rational decisions and a duty to exercise
reasonable supervision of officers and employees.
c. Incorrect. There is no duty of revision.
d. Incorrect. In the financial world, there is such as thing as “derivatives,”
but directors and officers do not have a duty of derivation.
3.
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 purchase watered stock.
d. overseeing the activities of employees during their daily work.
Answers:
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. Directors and officers do not have such a duty.
d. Incorrect. This is a duty owed by officers, but it is part of the duty of
care, not the duty of loyalty.
4.
Which of the following would likely be considered a breach of a director’s
duty of loyalty?
a. Having an interest in the corporation and its mission.
b. Authorizing a transaction that is beneficial to minority shareholders.
c. Competing with the corporation.
d. Exercising reasonable supervision.
Answers:
a. Incorrect. Such action would be in keeping with the director’s duty.
b. Incorrect. Such an action would not violate the duty.
c. Correct. Directors who compete with the corporation violate their duty
of loyalty.
d. Incorrect. Exercising reasonable supervision is a duty of a director.
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.
Answers:
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.
The business judgment rule states that:
a. corporate directors and officers are immune from liability for exercising
poor business judgment in certain circumstances.
b. corporate directors and officers are never immune from liability for
exercising poor business judgment, regardless of the circumstances.
c. shareholders may be personally liable for the negligent torts committed
by the directors of a corporation if these torts are the result of a lack of
oversight.
d. directors may never be held liable for corporate harms or losses, as
long as they have attended board meetings and agreed to corporate
actions.
Answers:
a. Correct. The business judgment rule states that directors and officers
are immune from liability for exercising poor business judgment in
certain circumstances (if they acted in good faith and in what they
thought was the corporation’s best interests, and if their actions did not
violate their fiduciary duties and were not ultra vires).
b. Incorrect. The rule does not immunize directors and officers from
liability for poor business judgment in all circumstances.
c. Incorrect. Shareholders are not personally liable for torts committed by
directors.
d. Incorrect. If directors breach their fiduciary duties, they may be sued
and will not have immunity from liability.
7.
Suzy signs a written agreement with Phillip, giving Phillip the right to cast
Suzy’s votes for a certain group of people nominated for the Syllibar
Corporation board of directors. This agreement between Suzy and Phillip
is known as:
a. a derivative agreement.
b. a proxy.
c. a subpoena.
d. a cumulative voting agreement.
Answers:
a. Incorrect. There are shareholder’s derivative lawsuits, but this
agreement does not describe them.
b. Correct. A proxy is the authorization one shareholder gives to
someone else to vote his or her shares in a particular, authorized way.
c. Incorrect. A subpoena is a command to appear at a certain time and
place to submit evidence or give testimony.
d. Incorrect. This is not a cumulative voting agreement.
8.
The reason why most states either permit or require the use of cumulative
voting when electing directors is:
a. to reduce fraud among voters.
b. to allow minority shareholders a greater chance at representation on
the board of directors.
c. to allow corporate officers to manage elections more easily and with
greater assurance of the outcome.
d. to allow directors to have a greater input into the election process.
Answers:
a. Incorrect. Cumulative voting is not designed to reduce voter fraud.
b. Correct. This means of voting gives minority shareholders a greater
chance of placing their candidates on a board of directors.
c. Incorrect. The point of cumulative voting is not to give officers an
easier time managing elections or to assure the outcome of an
election.
d. Incorrect. The reason behind cumulative voting is not to give directors
greater input into the process.
9.
When a corporation suffers a wrong as a result of actions taken or not
taken by the corporate directors, one effective and appropriate way to
address the harm is:
a. through the issuance of preemptive rights.
b. through the use of stock warrants.
c. through a shareholder’s derivative suit.
d. through shareholders voting in new officers.
Answers:
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. When those in control of a corporation—the corporate
directors—fail to sue in the corporate name to redress a wrong
suffered by the corporation (or when the corporation has suffered a
wrong resulting from the actions of the directors), the shareholders can
bring a suit “derivatively,” in the name of the corporation.
d. Incorrect. Shareholders may not vote in new officers.
10.
The liability of shareholders:
a. is unlimited.
b. is just like that of partners.
c. is limited to their investment in the stock.
d. is limited to a maximum of $50,000.
Answers:
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.