Question 1

John Hollin was an officer, director, and employee of a large broadly held corporation. At a directors' meeting, he learned that the corporation was voting on a resolution to buy a piece of property from Sam Keanu for $100,000. It happened that Hollin was one of three co-owners of that property. Hollin voted for the purchase and the resolution passed without discussion by a vote of 5-0. Several months after completion of the purchase, the other directors learned of Hollin's ownership and called on him to account to the corporation for any profit made. Which of the following is false?

Accepted Answer

Shareholders cannot force the corporation to buy them out under a dissent procedure in this scenario. The dissent procedure typically applies to situations like mergers or consolidations, not conflicts of interest or breaches of fiduciary duty by directors.

Question 2

The directors held their last meeting on December 31 at 4:30 p.m., and it was conducted more like a party than a usual meeting. A director was negligent in signing a promissory note, which cost the corporation $15,000; furthermore, the director was in breach of his fiduciary duty because the note was paid to a corporation in which he had an interest. Which of the following is true?

Accepted Answer

A shareholder may commence a derivative action on behalf of the corporation against a director if the director breached his or her fiduciary duty. However, the shareholder must first obtain permission from the court to bring such an action.

Question 3

An agent owes a fiduciary duty to his principal; a director owes a fiduciary duty to the corporation; partners owe a fiduciary duty to the firm and to the other parties. Which of the following is not true with regard to one's fiduciary duty?

Accepted Answer

The statement about a shareholder owning a business that secretly competes with the corporation is not entirely accurate. While it is true that a shareholder owes a duty of loyalty to the corporation, it is not necessarily a breach of fiduciary duty for a shareholder to own or operate a competing business. Rather, the shareholder's duty would be to refrain from using confidential information or trade secrets acquired through his or her relationship with the corporation to benefit the competing business at the expense of the corporation.

Question 4

Your friend Harry became wealthy through the tremendous success of a gadget he designed that allowed micro-chips to be produced without being touched by humans. He has been invited to sit on the board of directors of different corporations. He is aware of the increasing number of cases finding directors personally liable. He does not want to be connected with a corporation involved with any wrong-doing. He has hired you to prepare in-depth reports on five corporations. Your reports reveal the following. In which of these is there no legal wrong?

Accepted Answer

There is no legal wrong in the case of 1999872 Canada Ltd. as the minority shareholder has the right to protest and try to prevent the corporation's planned logging operation.

Question 5

Another term commonly used where a bond is involved is

Accepted Answer

A debenture is a type of bond that is not secured by physical assets or collateral. It is essentially an unsecured loan issued by a company or government entity, which promises to pay the investor a fixed interest rate in return for the use of their funds. Debentures are often used by companies to raise capital for large projects or to refinance existing debt.

Question 6

In jurisdictions where the registration system of incorporation is used, registration is accomplished by filing which of the following combinations of documents?

Accepted Answer

The answer of In jurisdictions where the registration system of...

Question 7

Which of the following is an example of a breach of a fiduciary duty?

Accepted Answer

The partner in the firm breached their fiduciary duty by taking advantage of information and resources belonging to the partnership for their personal gain, without giving the partnership a fair opportunity to benefit from the transaction. This is a clear example of self-dealing and a breach of the partner's duty of loyalty to the partnership.

Question 8

Mr. A is the sole shareholder of X Ltd., and is also a director of Y Ltd. Y Ltd. is negotiating to buy property from X Ltd. Which of the following is false?

Accepted Answer

While Mr. A does have a duty to act in the best interests of Y Ltd. and to avoid conflicts of interest, option B is false because disclosing his position to the board of directors of Y Ltd. is not enough. To protect himself and avoid liability, Mr. A must fully disclose his interest to the other directors and refrain from voting or influencing the decision. This is because even a potential conflict of interest can compromise Mr. A's ability to act in the best interests of Y Ltd. and could be seen as a breach of his fiduciary duty as a director. Option D is also true, as failure to disclose his interest could result in Mr. A being held liable to Y Ltd. for any profits he makes on the transaction and for any losses suffered by the company. Option E is also true - Mr. A does not owe a fiduciary duty to X Ltd. or to his fellow shareholders since he is the only shareholder.

Question 9

In 2011, Rambolin incorporated Rambolin Industries Ltd. and became its sole shareholder. He lent the corporation $10,000 and took a chattel mortgage from the corporation as security for repayment of the loan. He became director, president, and secretary of the corporation. The corporation prospered. Last year, you began supplying the corporation with office supplies. You were paid at the end of each month for supplies delivered during that month. For the last six months, however, you have not been paid. You learn that other suppliers have not been paid either because sales had dropped drastically, apparently due to Rambolin's nasty temper caused by ill health. Which of the following is true?

Accepted Answer

In the event of the corporation going bankrupt, Rambolin as a secured creditor would be in a better position to recoup his investment than an unsecured creditor such as the office supplier.

Question 10

Mr. Ace of Oink Inc., a closely-held corporation, is one of three shareholders. After several years of considerable success, the corporation hit hard times. The other shareholders, Mr. Bane and Mr. Curr, in the best interests of the corporation, voted Mr. Ace out as a director and voted not to renew his employment contract. Upset by these events, Mr. Ace just wanted to sell his interest and leave the corporation. The other two shareholders, however, refused to buy his shares. Furthermore, when he attempted to sell his shares to his brother, who was interested in the corporation, they refused to register the brother as a member. Which of the following is true?

Accepted Answer

A shareholders' agreement would typically outline the process for buying and selling shares in the corporation, including any restrictions on who can buy them and how they must be registered. Without such an agreement, Mr. Ace may be stuck with his shares unless he can find a buyer approved by the other shareholders, or unless he can convince a court to intervene. However, none of the other options presented here would likely be successful for Mr. Ace in this situation.

Question 11

Jed Wimsey, in auditing the books of various businesses around town, was talking to you, his best friend, about certain practices that he thought improper. Which of the following practices he found would be a breach of fiduciary duty?

Accepted Answer

Starting a competing business without the knowledge or consent of partners is a breach of fiduciary duty as it involves a conflict of interest and a lack of loyalty to the partnership.

Question 12

In which of the following relationships is a fiduciary duty owed?

Accepted Answer

The answer of In which of the following relationships is...

Question 13

Art Raskle was an officer, director, and employee of a broadly held corporation. At a directors' meeting, he was surprised but pleased to learn that the corporation was discussing a resolution to contract with the firm of Fielding's Office Supply for $200 worth of office equipment. He and a businesswoman recently bought that business; Raskle has a 45% interest. Raskle voted for the contract and the resolution passed without discussion by a vote of 6-0. Several months after completion of the purchase, the other directors learned of Raskle's interest in Fielding's Office Supply and called on him to account to the corporation for any profit made. Which of the following is true?

Accepted Answer

As a director, officer and employee of a corporation, Raskle has a fiduciary duty to act in the best interest of the corporation and to disclose any personal interest in transactions involving the corporation. By voting for the contract with Fielding's Office Supply without disclosing his interest, Raskle breached his fiduciary duty. He must therefore account for any profit made. The dollar value of the contract is irrelevant in this case.

Question 14

Which two of the following are examples of breaches of fiduciary duty?

Accepted Answer

E  C is a breach of fiduciary duty because the director used insider information for personal gain, which is a conflict of interest. E is a breach because the promoter sold property at an inflated price, even though disclosure was made, it still constitutes self-dealing and unfair advantage.

Question 15

Which of the following situations would allow a shareholder to sue on behalf of the corporation?

Accepted Answer

Shareholders can sue on behalf of the corporation in cases where the corporation has been wronged by the actions of its directors or officers, but the corporation has failed to take any action against the wrongdoer. This is known as a derivative lawsuit. Option B describes such a situation where the corporation has lost $30,000 due to the negligent and fraudulent acts of a director, but the corporation is not taking any action. Therefore, the shareholders can file a derivative lawsuit on behalf of the corporation. None of the other options describe situations where shareholders can sue on behalf of the corporation.

Question 16

You have been asked by two fellow graduates to join them in incorporating a closely held corporation that would commence a consulting business. One was in your class, so you know him quite well, but the other is graduating from a different school. You have been discussing the law to review the protection it gives you. Read each of the following statements separately and indicate which is false.

Accepted Answer

This statement is false. If you were voted out as a director by the others, you may not be able to sell your shares without interference from the other directors, especially if there are any restrictions on transferability in the shareholder agreement or in the articles of incorporation.

Question 17

If a corporation had been wronged by negligent and fraudulent acts of one of its directors and consequently suffered a $45,000 loss, and the board of directors would not take any action on behalf of the corporation against the wrongdoer, which of the following is true?

Accepted Answer

A derivative action allows a shareholder to commence an action on behalf of the corporation when the board of directors fails to take action against the wrongdoer. This is the appropriate course of action for the corporation in this scenario. Option A is incorrect because a pre-emptive right allows a shareholder to maintain their percentage ownership in the corporation by purchasing additional shares before a new issue is made available to the general public, it does not pertain to legal action against wrongdoers. Option B is incorrect because the dissent procedure applies when a shareholder disagrees with a fundamental change to the corporation, not legal action against a director. Option D is incorrect because a corporation can take legal action through its authorized agents (such as the board of directors), but if they fail to do so, a shareholder can initiate a derivative action. Option E is incorrect because oppression is a concept related to the abuse of power by a dominant shareholder, not an appropriate course of action in response to fraudulent acts by a director.

Question 18

Jack Kihn incorporated and put $20,000 into the corporation by way of a shareholder's loan and took back a chattel mortgage on the corporation's equipment. The corporation created decorative boxes. An employee of the company delivered some boxes to a customer who complained about the colour used. The employee became so angry that he shoved the customer, who fell into a glass display case, causing $30,000 damage to the customer and the case. On these facts, which of the following is false?

Accepted Answer

Kihn himself is not vicariously liable for the damage caused by the employee because vicarious liability typically applies to employers, not individual shareholders.

Question 19

The promoter of a corporation, called Seymour Holdings Ltd., contracted for $4,000 worth of office furniture "on behalf of Seymour Holdings Ltd.," prior to incorporation. After incorporation, the new directors want to ensure that the corporation is bound. They will be able to do so if

Accepted Answer

The best way for the directors to ensure that the corporation is bound by the contract is to ratify the contract after incorporation. Ratification means that the corporation adopts the contract and becomes a party to it. Ratification is generally permitted in most jurisdictions.

Question 20

With regard to the law of corporations, which of the following is true?

Accepted Answer

This is true because if a corporation pays a dividend when it is insolvent, the directors may be held personally liable to the corporation's creditors. This is known as the duty to prevent the unlawful distribution of assets. A, B, D, and E are all false statements.

Quiz 12: Corporations