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Interactive Quiz for ALT-12e, Chapter 40
Chapter 40 – Corporate Directors, Officers, and Shareholders
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. 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.
4. 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.
5. 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.
6. 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.
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. a preemptive right.
b. a proxy right.
c. a warrant agreement.
d. an attachment right.
Answers:
a. Correct. This describes a preemptive right—the right of existing shareholders 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. A person who is appointed by a court to wind up corporate affairs and to liquidate the business assets of a corporation is known as:
a. the trustor.
b. the receiver.
c. the retainer.
d. the director-in-trust.
Answers:
a. Incorrect. Directors will serve as trustees during the liquidation of a corporation, but there are no trustors.
b. Correct. In a corporate dissolution, a court-appointed person who winds up corporate affairs and liquidates assets is known as a receiver.
c. Incorrect. A retainer is a price paid to someone to assure access to their services.
d. Incorrect. This is not the name for a person appointed to wind up corporate affairs and liquidate corporate assets.
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. In order to purchase shares of stock, a buyer may use:
a. cash only.
b. promissory notes only.
c. either cash or promissory notes.
d. cash, property, or services rendered.
Answers:
a. Incorrect. Buyers may also use property or services rendered.
b. Incorrect. Buyers may not use promissory notes.
c. Incorrect. Buyers may use cash, but not promissory notes.
d. Correct. Buyers may use any of these forms of payment.