Board of Directors Questions
Medgar Evers College
Questions from Mark E. Roszkowski’s Business Law for the CPA Candidate: CPA Problems, 9th Ed.
1. 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
2. The Business Judgment Rule is a rule that immunizes corporate
a. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of management to make.
b. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.
c. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of shareholders to make.
d. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of shareholders to make.
3. Smith was an officer of CCC Corp. As an officer, the business judgment rule applied to Smith in which of the following ways?
a. Because Smith is not a director, the rule does not apply.
b. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
c. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
d. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
4. Which of the following actions is required to ensure the validity of a contract between a corporation and a director of a corporation?
a. An independent appraiser must render to the board of directors a fairness opinion on the contract.
b. The director must disclose the interest to the independent members of the board and refrain from voting.
c. The shareholders must review and ratify the contract.
d. The director must resign from the Board of Directors.
5. Under the Revised Model Business Corporation Act, a corporate director is authorized to
a. Rely on information provided by the appropriate corporate officer.
b. Serve on the board of directors of a competing business.
c. Sell control of the corporation.
d. Profit from insider information.
6. Grandiose secured an option to purchase a tract of land for $100,000. He then organized the Dunbar Corporation and subscribed to 51% of the shares of stock of the corporation for $100,000, which was issued to him in exchange for his three-month promissory note for $100,000. Controlling the board of directors through his share ownership, he had the corporation authorize the purchase of the land from him for $200,000. He made no disclosure to the board or to other shareholders that he was making a $100,000 profit. He promptly paid the corporation for his shares and redeemed his promissory note. A disgruntled shareholder subsequently learned the full details of the transaction and brought suit against Grandiose on the corporation’s behalf. Which of the following is a correct statement?
a. Grandiose breached his fiduciary duty to the corporation and must account for the profit he made.
b. The judgment of the board of directors was conclusive under the circumstances.
c. Grandiose is entitled to retain the profit since he controlled the corporation as a result of his share ownership.
d. The giving of the promissory note in exchange for the stock constituted payment for the shares.
7. Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation?
a. An officer may nor simultaneously serve as a director.
b. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.
c. Stockholders always have the right to elect a corporation’s officers.
d. An officer of a corporation is required to own at least one share of the corporation’s stock.
8. Fairwell is executive vice president and treasurer of Wonder Corporation. He was named as a party in a shareholder derivative action in connection with certain activities he engaged in as a corporate officer. In the lawsuit, it was determined that he was liable for negligence in performance of his duties. The board would like to indemnify him. The articles of incorporation do not contain any provisions regarding indemnification of officers and directors. Indemnification
a. Is not permitted since the articles of incorporation do not so provide.
b. Is permitted only if he is found not to have been grossly negligent.
c. Can not include attorney’s fees since he was found not to have been negligent.
d. May be permitted by court order despite the fact that Fairwell was found to be negligent.
9. Which of the following statements is correct regarding the fiduciary duty?
a. A director’s fiduciary duty to the corporation may be discharged by merely disclosing his self-interest.
b. A director owes a fiduciary duty to the shareholders but not to the corporation.
c. A promoter of a corporation to be formed owes no fiduciary duty to anyone, unless the contract engaging the promoter so provides.
d. A majority shareholder as such may owe a fiduciary duty to fellow shareholders.
10. Jane Cox, a shareholder of Mix Corp. has properly commenced a derivative action against Mix’s Board of Directors. Cox alleges that the Board breached its fiduciary duty and was negligent by failing to independently verify the financial statements prepared by management upon which Smart & Co., CPAs, issued an unqualified opinion. The financial statements contained inaccurate information which the Board relied upon in committing large sums of money to capital expansion. This resulted in Mix having to borrow money at extremely high interest rates to met current cash needs. Within a short period of time, the price of Mix Corp. stock declined drastically. Which of the following statements is correct?
a. The Board is strictly liable, regardless of fault, since it owes a fiduciary duty to both the corporation and the shareholders.
b. The Board is liable since any negligence of Smart is automatically imputed to the Board.
c. The Board may avoid liability if it acted in good faith and in a reasonable manner.
d. The Board may avoid liability in all cases where it can show that it lacked scienter.
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