Chapter 21Practice Exam
Matching Questions
Match the following terms with their definitions:
(5)A.Duty of loyalty.
(1)B.Duty of care.
(3)C.Promoter.
1.Requires managers to act in the best interests of the corporation
3.Someone who organizes a corporation
5.Prohibits managers from making a decision that benefits them at the expense of the corporation
True/False Questions
Circle true or false:
1.TFA corporation can be formed in any state or under the federal corporate code.
3.TFMost companies use a very broad purpose clause in their charter.
5.TFTo be elected to the board of directors, nominees must receive a majority of the votes cast.
Multiple-Choice Questions
7.CPA QUESTION: A corporate stockholder is entitled to which of the following rights?
(a)Elect officers
(b)Receive annual dividends
(c)Approve dissolution
(d)Prevent corporate borrowing
9.Generally, a corporation’s by-laws include all of the following except:
(a)Par value of the stock
(b)The date of the shareholders meeting
(c)The number of directors
(d)The titles of officers
(e)The date of the fiscal year
Short-Answer Questions
11.Michael Ferns incorporated Erin Homes, Inc., to manufacture mobile homes. He issued himself a stock certificate for 100 shares for which he made no payment. He and his wife served as officers and directors of the organization, but, during the eight years of its existence, the corporation held only one meeting. Erin always had its own checking account, and all proceeds from the sales of mobile homes were deposited there. It filed federal income tax returns each year, using its own federal identification number. John and Thelma Laya paid $17,500 to purchase a mobile home from Erin, but the company never delivered it to them. The Layas sued ErinHomes and Michael Ferns, individually. Should the court “pierce the corporate veil” and hold Ferns personally liable?
Answer: The appeals court pierced the corporate veil and held the shareholder liable because the corporation had grossly inadequate capitalization, had disregarded corporate formalities, and the shareholder was actively participating in the operation of the business. Laya v. Erin Homes, Inc., 177 W. Va. 343, 352 S.E.2d 93 (1986).
13. ETHICS: Edgar Bronfman, Jr., dropped out of high school to go to Hollywood and write songs and produce movies. Eventually, he left Hollywood to work in the family business—the Bronfmans owned 36% of Seagram Co., a liquor and beverage conglomerate. Promoted to president of the company at the age of 32, Bronfman seized a second chance to live his dream. Seagram received 70% of its earnings from its 24% ownership of DuPont Co. Bronfman sold this stock at less than market value to purchase (at an inflated price) 80% of MCA, a movie and music company that had been a financial disaster for its prior owners. Some observers thought Bronfman had gone Hollywood, others that he had gone crazy. After the deal was announced, the price of Seagram shares fell 18%. Was there anything Seagram shareholders could have done to prevent what to them was not a dream but a nightmare? Apart from legal issues, was Bronfman’s decision ethical? What ethical obligations did he owe Seagram’s shareholders?
Answer:The Seagram shareholders have little choice other than the “Wall Street walk.” Seagram will not merge with MCA, so shareholder approval of the purchase is not necessary. The sale of DuPont stock is not significant enough to require shareholder approval. It is unlikely that a court would hold that Seagram had violated the business judgment rule (discussed in Chapter 36). Floyd Norris, “Bronfman Follies: From Oil to Movies,” New York Times, Apr. 8, 1995, p. D1; Laura Landro and Eben Shapiro, “Seagram Sells Stake in DuPont So It Can Buy Control of MCA,” Wall Street Journal, Apr. 7, 1995, p. l.
15.ROLE REVERSAL: Write a multiple choice question that deals with the duty of care under the business judgment rule.