BLT&E-7e: Practice Quiz
Chapter 30:
Formation and Termination of a Corporation
1. A corporation is a legal entity:
a. created by the local government.
b. created and recognized by an entrepreneurial agency.
c. managed internally by the federal government.
d. created and recognized by state law in most cases.
Answers:
a. Incorrect. Corporations are creatures of state law, not of local law.
b. Incorrect. Corporations are not recognized by entrepreneurial agencies in any legal sense.
c. Incorrect. Although subject to extensive federal regulation, most corporations are created and recognized by state law, not federal law.
d. Correct. Corporations are both created and recognized by state law in most cases.
2. The responsibility for the overall management of a corporation belongs to:
a. the chief financial officer.
b. the employees.
c. the board of directors.
d. the shareholders.
Answers:
a. Incorrect. The chief financial officer may be a member of the board of directors, but he or she does not have responsibility for overall corporate management.
b. Incorrect. Employees do not have this responsibility.
c. Correct. The board of directors has responsibility for the overall management of a corporation.
d. Incorrect. Shareholders do not have this responsibility.
3. Articles of incorporation contain:
a. a set of governing rules adopted by a corporation.
b. resolutions of the board of directors.
c. information about the corporation, including its organization and functions.
d. the minutes of meetings of the board of directors.
Answers:
a. Incorrect. This describes corporate bylaws.
b. Incorrect. These resolutions are not the same thing as articles of incorporation.
c. Correct. Articles of incorporation contain this kind of information.
d. Incorrect. Board meeting minutes are not articles of incorporation.
4. The first step in the incorporation process is:
a. to draft a prospectus.
b. to draft corporate bylaws.
c. to select a state in which to incorporate.
d. to complete the articles of incorporation.
Answers:
a. Incorrect. This step would come later in the process.
b. Incorrect. This step would come much later in the process.
c. Correct. As a first step, you would decide on the state in which you wish to incorporate in order to take advantage of the differences between state corporation laws or for purposes of convenience.
d. Incorrect. This would be the next step in the process.
5. In corporate law, when a corporation acts beyond the scope of its authority, it is said to:
a. engage in respondeat superior.
b. pierce the corporate veil.
c. hide the corporate veil.
d. engage in ultra vires transactions.
Answers:
a. Incorrect. Respondeat superior is the doctrine that makes principals or corporations responsible for some of the harms caused by their agents or employees.
b. Incorrect. A court may pierce the corporate veil when a corporation does this, but the corporation itself does not pierce the corporate veil.
c. Incorrect. The corporation does not hide the corporate veil.
d. Correct. The corporation engages in an ultra vires transaction when it acts beyond the scope of its authority.
6. Preferred stock is a more conservative (less aggressive) investment than common stock because:
a. it never pays dividends.
b. it is less volatile and more like a bond.
c. its holders have voting rights, unlike common stock holders.
d. it is not tradable, assignable, or sellable.
Answers:
a. Incorrect. Like bonds, preferred stock pays regular dividends.
b. Correct. Preferred stock normally pays a fixed dividend that is less risky than common stock; in this sense, it is more like a bond.
c. Incorrect. Preferred stockholders often do not have the right to vote.
d. Incorrect. Preferred stock is tradable, assignable, or sellable.
7. If Company F and Company G join and become Company H, what legal process has taken place?
a. A merger.
b. An acquisition.
c. A consolidation.
d. An appraisal.
Answers:
a. Incorrect. This joining of F and G to become H is not a merger, but a consolidation.
b. Incorrect. This joining of F and G to become H is not an acquisition, but a consolidation.
c. Correct. F and G combine to make a wholly new legal entity known as H. This describes a consolidation.
d. Incorrect. This is not an appraisal; it is a consolidation.
8. Which of the following IS NOT a basic requirement of a merger?
a. Each board of directors must approve the merger.
b. All corporate officers for each corporation must approve the merger.
c. The shareholders of each corporation must approve the merger.
d. The state must issue a certificate of merger once other formal requirements are met.
Answers:
a. Incorrect. Each board of directors must approve the mergers.
b. Correct. All corporate officers do not need to approve the merger—only those officers who are also members of the boards of directors.
c. Incorrect. Shareholders of each corporation must approve the merger.
d. Incorrect. After all other formal requirements are met, the state must issue a certificate of merger.
9. Mitchell owns 3,000 shares of Dynamix Corporation. Dynamix decides to merge with Clomator, Inc., which makes plastic packaging for food. Mitchell is very unhappy about this decision. If Mitchell does not want to sell his stock, what is one other option he has to express his dissatisfaction?
a. If appraisal rights are available, he may choose to exercise those rights.
b. If he follows the correct procedure, he may demand a short-form merger.
c. He may use his preemptive rights.
d. He may require a dissolution.
Answers:
a. Correct. If a state statutes allows for it, Mitchell may, as a dissenting shareholder, have his stock appraised and be paid the fair value of the shares.
b. Incorrect. Mitchell may not demand a short-term merger. This is not something shareholders have the power to do.
c. Incorrect. Mitchell may not use preemptive rights in this case.
d. Incorrect. Mitchell does not have the power to require a corporate dissolution.
10. Which of the following IS NOT a permissible way to bring about a corporate dissolution?
a. By voluntary approval of the shareholders and directors.
b. By an act of the legislature of the state in which the company is incorporated.
c. By executive order of the president.
d. By the unanimous action of all shareholders.
Answers:
a. Incorrect. This is an acceptable way to dissolve a corporation.
b. Incorrect. Corporations may be dissolved by an act of legislature in the state of incorporation.
c. Correct. The president may not dissolve a corporation by an executive order.
d. Incorrect. If shareholders unanimously agree to dissolve a corporation, this is permissible.