CORPORATIONS QUESTIONS
Question 1
When is a court most likely to disregard the
separate identity of a subsidiary corporation
and allow recovery from the parent
corporation?
(A) When the parent corporation has
greater resources than the subsidiary
corporation.
(B) When the parent corporation
essentially controls the
decisionmaking of the subsidiary
corporation by electing its board of
directors.
(C) When the parent corporation owns
100% of the stock of the subsidiary
corporation.
(D) When the parent corporation has
inadequately capitalized the
subsidiary without a reasonable
expectation that the subsidiary will
achieve financial independence.
Question 2
Which of the following qualities generally is
not considered a characteristic of the
corporate form?
(A) Limited liability for owners.
(B) Centralized management.
(C) Flow-through taxation.
(D) Free transferability of ownership.
Question 3
Which of the following people would not be
held liable for insider trading under rule
10b-5?
(A) The president of a corporation who
knows that the corporation is about
to announce the launch of a
groundbreaking new product and
buys company stock in anticipation
of the product’s success.
(B) An accountant who, while acting as
an independent contractor, discovers
a major financial error in the
corporation’s books, and then sells
all of his stock in the corporation
before revealing the error.
(C) A director who advises his niece to
sell all of her stock in the corporation
because he has received word that
the corporation is about to be named
the defendant in a class action
lawsuit.
(D) A bartender who sells all of her stock
in the corporation after she overhears
two of the corporation’s directors
discussing the company’s recent
financial difficulties over drinks.
Question 4
Which of the following is not a requirement
to satisfy a director’s duty of care?
(A) The director must act in good faith.
(B) The director must act with the care
that an ordinarily prudent person in a
like position would exercise under
similar circumstances.
(C) The director must act in a manner the
director reasonably believes to be in
the best interests of the corporation.
(D) The director must act in reliance on
her own business judgment and not
in reliance on the opinions of others.
Question 5
Which of the following is not a necessary
element for a successful cause of action
under section 16(b) of the Securities
Exchange Act?
(A) An officer, director, or more than
10% shareholder of a corporation
made a profit.
(B) The profit was made on the purchase
or sale of an equity security.
(C) The profit was made by use of
insider information.
(D) The purchase and sale or sale and
purchase was within a six-month
period.
Question 6
Which of these choices outlines the proper
steps for adopting a fundamental corporate
change?
(A) The board adopts a resolution
recommending the change; a notice
describing the proposed change is
sent to the shareholders; after
allowing time for shareholder
comments, the change is approved
by the board; the change is
formalized in articles that are filed
with the state.
(B) The board adopts a resolution
recommending the change; a notice
describing the proposed change is
sent to the shareholders; the change
is approved by the shareholders; the
change is formalized in articles that
are filed with the state.
(C) A formal notice describing the
proposed change is filed with the
state; notice is sent to the
shareholders; the change is approved
by the shareholders; the change is
formalized in articles that are filed
with the state.
(D) A formal notice describing the
proposed change is filed with the
state; notice is sent to the
shareholders; after allowing time for
shareholder comments, the change is
approved by the board; the change is
formalized in articles that are filed
with the state.
Question 7
Which of the following statements is true
regarding a promoter’s personal liability on
a preincorporation contract?
(A) A promoter is personally liable even
if the contract expressly states that
the promoter is not to be bound.
(B) A promoter remains liable even if the
corporation is formed and adopts the
contract.
(C) A promoter is acting as an agent for
the unformed corporation and is not
personally liable.
(D) The corporation, not the promoter, is
the intended beneficiary to the
contract so the promoter is not
personally liable.
Question 8
Which of the following statements is true if
a share has a $5 noncumulative preference?
(A) The share is entitled to a $5 annual
payment.
(B) The share is entitled to a $5 payment
before a distribution can be made on
account of common shares.
(C) The share is entitled to a $5 payment
plus the distribution paid on account
of a common share whenever a
distribution is made on account of
common shares.
(D) The share is entitled to a $5 payment
each quarter and any missed
preference payments must be paid
before a distribution can be made on
account of common shares.
Question 9
A 3% shareholder of a corporation
purchases an additional 11% of the
company’s stock. Two months later, he sells
all his stock to fund his retirement overseas.
Is the shareholder liable under section 16(b)
of the Securities Exchange Act of 1934 for
the profits he made on the sale?
(A) Yes, as a holder of more than 10% of
the corporation’s stock he is strictly
liable for any profits made within a
six month period.
(B) Yes, because he sold more than 10%
of the company’s stock within two
months of purchasing it.
(C) No, section 16(b) would not be
triggered because he was not a 10%
shareholder at the time he purchased
the additional 11% of the stock.
(D) No, because he sold his stock to fund
his retirement, not on the basis of
any insider information.
Question 10
In which of these situations is a court least
likely to pierce the corporate veil?
(A) When corporate formalities are
ignored and injustice results.
(B) When the corporation was
inadequately capitalized at the
outset.
(C) When the corporation becomes
insolvent due to poor management.
(D) When necessary to prevent fraud on
creditors.
Question 11
Which of the following statements regarding
shareholder lawsuits is most accurate?
(A) All shareholder suits against their
corporation are known as derivative
actions because they all derive from
the shareholder’s relationship to the
corporation.
(B) Since shareholders are technically
the owners of a corporation, they
cannot bring any lawsuit against the
corporation because to do so would
be the equivalent of suing
themselves.
(C) Shareholders can bring direct actions
against their corporation to enforce
their own rights and any recovery
will be for their own benefit;
shareholders can sometimes bring
derivative actions to enforce the
rights of the corporation, but in those
cases recovery generally goes to the
corporation and the shareholders
bringing the action can only recover
their reasonable expenses.
(D) Shareholders have the right to bring
lawsuits against their corporation at
any time, but their fiduciary duty to
their fellow shareholders requires
that any recovery be shared by all the
shareholders in proportion to the
amount of shares held.
Question 12
For a private plaintiff to recover damages
under rule 10b-5, the plaintiff must show all
of the following except:
(A) The defendant engaged in fraudulent
conduct.
(B) The defendant purchased or sold
securities.
(C) The defendant’s conduct involved
the use of some means of interstate
commerce.
(D) The defendant’s actions caused the
plaintiff damages.
Question 13
When is a corporation liable for a pre-
incorporation contract that a promoter
signed on behalf of the corporation?
(A) Never, a corporation cannot be held
liable on a contract that was formed
before its existence.
(B) As soon as the corporation is formed,
because a promoter serves as the
agent of a corporation prior to its
existence.
(C) When the corporation expressly or
impliedly adopts the contract as its
own.
(D) Only when there is a novation
formally releasing the promoter of
liability and substituting the
corporation.
Question 14
Which of the following statements regarding
the president of a corporation is true?
(A) The president of a corporation only
has the authority that is expressly
granted in the corporation’s articles
of incorporation.
(B) The president of a corporation has
implied authority to enter into
contracts on behalf of the
corporation in the ordinary course of
corporate affairs.
(C) The president of a corporation has no
authority to bind the corporation
without the express approval of the
corporation’s board of directors.
(D) The president of a corporation has
absolute authority to run the
corporation in any reasonable
manner she sees fit under the
business judgment rule.
Question 15
Which of these alone is not an adequate
reason for upholding a transaction in which
a director has a conflicting personal interest?
(A) The transaction, judged according to
circumstances at the time of the
commitment, was fair to the
corporation.
(B) The transaction will result in any
tangible or intangible benefit to the
corporation.
(C) The transaction was approved by a
majority of the votes entitled to be
cast by shareholders without a
conflicting interest in the transaction
after all material facts have been
disclosed to the shareholders.
(D) The transaction was approved by a
majority of the directors (but at least
two) without a conflicting interest
after all material facts have been
disclosed to the board.