Business Law II Second Exam

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PARTNERSHIP BY ESTOPPEL
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If someone is not a member of a partnership, she will nonetheless be considered a partner by estoppel if (1) she tells other people she is a partner or allows other people to say, without contradiction, that she is a partner; (2) a third party relies on this assertion; and (3) the third party suffers harm.
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FORMING A PARTNERSHIP
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In determining whether a partnership exists, a court will consider whether the parties: •Share the profits of the business, •Share the losses of the business, •Share management of the business, and •Have an oral or written partnership agreement
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PARTNERS AS AGENTS
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Every partner is an agent of the partnership for the purpose of its business. A partnership is responsible for the intentional and negligent torts of a partner that occur in the ordinary course of the partnership’s business or with the actual, implied or apparent authority of the other partners.
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A PARTNER’S LIABILITY FOR THE DEBTS OF THE PARTNERSHIP
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All partners are personally liable for all debts of the partnership incurred while they were members of the partnership. Partners have joint and several liability for partnership obligations. A partner’s liability for debts incurred before she became a partner is limited to her investment in the partnership.
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DEFAULT RULES AMONG PARTNERS
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Unless they agree otherwise, partners: •Share profits equally, •Share losses according to their share of profits, •Are not entitled to any payment beyond their share of profits, even if they perform work for the partnership, •Have no right to use or sell specific partnership property except for the benefit of the partnership, •Each have an equal vote, regardless of their contributions to the partnership, and •Each have an equal right in the management of the business.
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TRANSFERRING A PARTNERSHIP SHARE
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Without the approval of the other partners, a partner cannot sell her share. She can only transfer the right to receive profits and losses. A new partner can be admitted to a partnership only by unanimous consent of the other partners.
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CREDITORS’ RIGHTS
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Creditors can attach partnership profits through a charging order.
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A PARTNER’S LIABILITY TO THE PARTNERSHIP
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Partners are liable to the partnership for any damages resulting from their gross negligence, reckless conduct, intentional misconduct, or a knowing violation of the law. Partners are not liable to the partnership for ordinary negligence.
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DISSOCIATION
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A dissociation occurs when a partner leaves the partnership.
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AFTER DISSOCIATION
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When one or more partners dissociate, the partnership can either buy out the departing partner(s) and continue in business or wind up the business and terminate the partnership.
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PARTNERSHIP AT WILL
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If partners do not have an agreement about the duration of their partnership, it is called a partnership at will, and any of them can leave at any time for any reason.
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TERM PARTNERSHIP
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With a term partnership, the partners have agreed in advance how long the partnership will last.
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DISSOCIATED PARTNER
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A dissociated partner is liable to outsiders for debts incurred during her term as a partner, but the partnership must indemnify her for these debts. A dissociated partner is liable for the debts of the partnership incurred within two years after she leaves, but only if the creditor reasonably believes she is still a partner. The partnership must indemnify her for these debts.
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ENDING A PARTNERSHIP
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If the partners decide to end the partnership business, they must take three steps: dissolution, winding up, and termination.
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PROMOTERS
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Promoters are personally liable for contracts they sign before the corporation is formed unless the corporation and the third party agree to a novation.
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THE CHARTER
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Required Provisions: A corporate charter must generally include the company’s name, address, registered agent, purpose, and a description of its stock. The charter must be signed by at least one incorporator. Optional Provisions: A company’s charter may include a number of optional provisions, such as cumulative voting and indemnification for officers and directors.
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PIERCING THE CORPORATE VEIL
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A court may, under certain circumstances, pierce the corporate veil and hold shareholders personally liable for the debts of the corporation.
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FIDUCIARY DUTY
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Officers and directors have a fiduciary duty to act in the best interests of the shareholders of the corporation.
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BUSINESS JUDGMENT RULE
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If managers comply with the business judgment rule, a court will not hold them personally liable for any harm their decisions cause the company, nor will the court rescind the decision.
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DUTY OF LOYALTY
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Managers may not enter into an agreement on behalf of their corporation that benefits them personally unless the disinterested directors or shareholders have first approved it. If the manager does not seek the necessary approval, the business judgment rule no longer applies, and the manager will be liable unless the transaction was entirely fair to the corporation.
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CORPORATE OPPORTUNITY
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Under the duty of loyalty, managers may not take advantage of an opportunity that rightfully belongs to the corporation.
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DUTY OF CARE
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Under the duty of care, managers must make legal, informed decisions that have a rational business purpose.
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WILLIAMS ACT
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The Williams Act regulates the activities of a bidder in a tender offer for stock in a publicly traded corporation.
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TAKEOVER DEFENSES
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Under common law, shareholder welfare must be the board’s primary concern when establishing takeover defenses. If it is clear that the company will ultimately be sold, the board must auction the company to the highest bidder; it cannot give preferential treatment to a lower bidder.
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DIRECTOR
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Directors, not shareholders, have the right to manage the corporate business.
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SHAREHOLDER RIGHTS
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Shareholders have the right to: •Receive annual financial statements (if their company is publicly traded), •Inspect and copy the corporation’s records (for a proper purpose), •Elect and remove directors, and •Approve fundamental corporate changes, such as a merger or a major sale of assets.
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SHAREHOLDER PROPOSALS
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Under certain circumstances, public companies must include shareholder proposals in the proxy statement.
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INDEPENDENT DIRECTORS
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Under SOX, all members of a board’s audit committee must be independent. For companies listed on the NYSE or NASDAQ, independent directors must comprise a majority of the board and only independent directors can serve on audit, compensation, or nominating committees.
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DISSENTERS’ RIGHTS
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A shareholder who objects to a fundamental change in the corporation can insist that her shares be bought out at fair value.
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RIGHTS AND OBLIGATIONS OF CONTROLLING SHAREHOLDERS
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Controlling shareholders: •May not enter into unfair business transactions with the corporation, •Have a fiduciary duty to minority shareholders, •May not exclude minority shareholders from beneficial arrangements involving stock, and •Are prohibited from expelling minority shareholders unless the expulsion is done for a legitimate business purpose. Beatty, Jeffrey F.; Samuelson, Susan S. (2012-01-13). Business Law and the Legal Environment, Standard Edition (Page 886). Cengage Textbook. Kindle Edition.
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DERIVATIVE LAWSUITS
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A derivative lawsuit is brought by shareholders to remedy a wrong to the corporation. The suit is brought in the name of the corporation, and all proceeds of the litigation go to the corporation.
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A sole proprietorship: (a) Must file a tax return (b) Requires no formal steps for its creation (c) Must register with the secretary of state (d) May sell stock (e) Provides limited liability to the owner
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Answer: B.
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CPA QUESTION Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has: (a) Both common and preferred stockholders (b) A partnership as a stockholder (c) 100 or fewer stockholders
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Answer: C.
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A limited liability company: (a) Is regulated by a well-established body of law (b) Pays taxes on its income (c) May issue stock options (d) Must register with state authorities (e) Protects the owners from personal liability for their own misdeeds
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Answer: D.
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CPA QUESTION A joint venture is a(n): (a) Association limited to no more than two persons in business for profit (b) Enterprise of numerous co-owners in a nonprofit undertaking (c) Corporate enterprise for a single undertaking of limited duration (d) Association of persons engaged as co-owners in a single undertaking for profit
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Answer: D.
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A limited liability partnership: (a) Has ownership interests that cannot be transferred (b) Protects the partners from liability for the debts of the partnership (c) Must pay taxes on its income (d) Requires no formal steps for its creation (e) Permits a limited number of partners
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Answer: B.
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What is the difference between close corporations and S corporations?
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Answer: S corporations are created by the IRS and are not a taxable entity. Close corporations are created by state law. They may or may not also be S corporations, but they are subject to less regulation than C corporations.
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As you will see in Chapter 33, Facebook began life as a corporation, not an LLC. Why did the founder, Mark Zuckerberg make that decision?
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Answer: He wanted venture capital money. Venture capitalists don’t like LLCs because they can’t go public, can’t issue stock options, and the laws regulating them are uncertain.
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Corporations developed to encourage investors to contribute the capital needed to create large-scale manufacturing enterprises. But LLCs are often start-ups or other small businesses. Why do their members deserve limited liability? And is it fair that LLCs do not have to pay income taxes?
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Answer: Limited liability and favorable tax treatment encourage entrepreneurs to start businesses which creates jobs and aids the economy.
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CPA QUESTION Which of the following is not necessary to create a partnership? (a) Execution of a written partnership agreement (b) Agreement to share ownership of the partnership (c) Intention of conducting a business for profit (d) Intention of creating a relationship recognized as a partnership
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Answer: A.
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2. If a partner dissociates, he is entitled to: (a) Force the termination of the partnership (b) Receive indemnification from liability for present partnership debt (c) Receive indemnification from damages he caused the partnership (d) Receive only his share of the value of the partnership assets when it ultimately liquidates
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Answer: B.
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Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the right to (1) participate in the management of TLC and (2) Cobb’s share of TLC’s partnership profits. Bean is correct as to which of these rights? (a) 1 only (b) 2 only (c) 1 and 2 (d) Neither 1 nor 2
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Answer: B.
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Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners. As a result of Fein’s withdrawal and Gold’s admission to the partnership, Gold: (a) Is personally liable for partnership liabilities arising before and after his admission as a partner (b) Has the right to participate in the management of ABC (c) Acquired only the right to receive Fein’s share of the profits of ABC (d) Must contribute cash or property to ABC in order to be admitted with the same rights as the other partners
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Answer: B.
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Blackriver Partnership is in the process of winding up. It has three partners: Jason, Keira and Lancelot. The partnership has assets of $90,000, but debts of $60,000, including $30,000 it owes to Jason. Who gets what? (a) Each partner receives $10,000. (b) Each partner receives $30,000. (c) Jason receives $30,000 and the other two get $10,000 each. (d) Jason receives $40,000 and the other two get $10,000 each.
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Answer: D.
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Seventy-Three Land, Inc., sued Maxlar Partners for the balance due on a note made by the partnership. Max, a partner, asked the court to dismiss the claim against him personally because the plaintiff had not first tried to collect against the partnership. Does Max have a valid claim?
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Answer: Creditors with contract claims against a partnership must first exhaust partnership assets before proceeding directly against individual partners.
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Pedro and Juan have a business selling ties with fraternity insignia. Pedro finds out that an online shirt business is for sale. It sounds like a great idea — customers send in their measurements and get back a custom-made shirt at a price no higher than off-the-rack shirts at the local department store. Does Pedro have to let Juan in on the great opportunity?
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Answer: Yes, if it relates to the partnership business, which this does.
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Brothers Sydney and Ashley were partners in a real estate partnership in Pennsylvania. They received identical salaries. Sydney moved to Florida to establish residency so that he could obtain a divorce there. His lawyer told him not to return to Pennsylvania until he had resolved his marital problems. After Sydney had been gone almost a year, Ashley decided to increase his own salary to compensate for the additional work he was doing. Does Ashley have the right to pay himself more if he is doing more work?
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Answer: Ashley was not entitled to additional compensation in return for his additional work because, in the absence of an agreement to the contrary, a partner is not entitled to compensation beyond his share of the profits for services rendered by him in performing partnership matters.
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Mike Love and Brian Wilson were members of the Beach Boys. In the 1960s, they wrote songs together. The copyrights for these songs were later sold to Rondor, which paid the two men royalties when the songs were played. In 2004, Wilson re-recorded some of these songs on a CD called Good Vibrations. This CD was distributed in the United Kingdom by the newspaper The Mail on Sunday. Love sued Wilson, arguing that the two men had a partnership and Wilson had violated the partnership agreement by re-recording the songs without Love’s permission. Did Mike Love and Brian Wilson have a partnership?
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Answer: In Love v. The Mail on Sunday, 2007 U.S. Dist. LEXIS 41678, the court ruled that there was no partnership. The songs were owned by Rondor not the partnership. The two men did not have an explicit partnership agreement, either written or oral. They never filed a partnership tax return. They may have had a partnership in the colloquial sense of the word, but not in the legal sense. They were simply songwriting collaborators.
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Dutch, Bill, and Heidi were equal partners in a lawn care business. Bill and Heidi wanted to borrow money from the bank to buy more trucks and expand the business. Dutch was dead set against the idea. When the matter came to a vote, Bill and Heidi voted in favor, Dutch against. Dutch was so annoyed that he told the bank not to lend the money and, further, that he would not be responsible for repaying the loan. The bank loaned the money, the business failed, and the bank sued all three partners. Is Dutch liable on the loan?
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Answer: Yes. Bill and Heidi’s vote was binding on the partnership and on all of the partners. Dutch would not have been liable if he had dissolved the partnership by withdrawing before the loan was made.
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Carrie and Laura started a business together to sell bridesmaids dresses online. Carrie spent months preparing the financials and meeting with potential investors while Laura designed dresses and found suppliers. Once Carrie was finished with the financials and had identified some potential investors, Laura announced that she preferred to work with Scott and Carrie was out of the business. What rights does Carrie have?
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Answer: A partner can only be expelled if the partnership agreement permits. Here, there is no agreement, hence Laura has no right to expel Carrie. However, Carrie probably does not want to litigate. This is a true case. The moral of the story is that Carrie should have had a partnership agreement before she invested so much time. Or she should have chosen her partner more carefully.
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Is it fair that partners are not entitled to be paid for work they do for the partnership? What about poor Arnold in the Peaceful Valley case – he was on call 24/7, his girlfriend was cleaning the latrines, but they were not entitled to be paid. Answer: Maybe not, in which case they should ask the partners to approve a salary or refuse to do the work. But they cannot just pay themselves whatever they want without the approval of the other partners.
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Answer: Maybe not, in which case they should ask the partners to approve a salary or refuse to do the work. But they cannot just pay themselves whatever they want without the approval of the other partners.
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Is there any good reason to be in a partnership? If so, for what sort of business would it make sense?
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Answer: It is an easy and cheap form of organization, but the liability is an important issues. Perhaps a short-term project with someone whom you trust and without much money or potential liability at stake. However, if there are any significant assets at stake, it is a good idea to have a written agreement.
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Generally, a corporation’s articles of incorporation must include all of the following except the: (a) Name of the corporation’s registered agent (b) Name of each incorporator (c) Number of authorized shares (d) Quorum requirements
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Answer: D.
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Destiny Manufacturing, Inc., is incorporated under the laws of Nevada. Its principal place of business is in California, and it has permanent sales offices in several other states. Under the circumstances, which of the following is correct? (a) California may validly demand that Destiny incorporate under the laws of the state of California. (b) Destiny must obtain a certificate of authority to transact business in California and the other states in which it does business. (c) Destiny is a foreign corporation in California, but not in the other states. (d) California may prevent Destiny from operating as a corporation if the laws of California differ regarding organization and conduct of the corporation’s internal affairs.
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Answer: B
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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
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Answer: C.
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Participating preferred stockholders: (a) only receive payment after other preferred shareholders have been paid (b) only receive payment after common shareholders have been paid (c) are treated like both a preferred shareholder and a common shareholder (d) receive all their payments before all other shareholders
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Answer: C.
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Debentures are: (a) long-term secured debt (b) short-term secured debt (c) long-term unsecured debt (d) short-term unsecured debt
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Answer: C
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Waste Management, Inc., the country’s largest waste hauler, changed its name to WMX Technologies, Inc. Similarly, U.S. Steel changed its moniker to USX Corp. and American Airlines became AMR Corp. What legal steps would be necessary to protect the new corporate names?
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Answer: It would have to amend its charter in its state of incorporation. It would also have to notify the other states in which it has qualified to do business. If there are states in which it is not incorporated and has not qualified, it might be able to pay a fee to reserve the name. Alternatively, it could register a “nameholder” corporation in those states.
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Dickens, Inc. is a bookstore incorporated in Nevada. From its warehouse in Montana, it ships books to all 50 states. The company’s owner lives in New York, its web designer lives in California. Where is Dickens a domestic corporation? Where must it qualify to do business?
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Answer: It is a domestic corporation in Nevada. It must qualify to do business in Montana, because it has a permanent presence there. If the web designer in California is a full-time employee, it would also have to register there.
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1. If a manager engages in self-dealing, which of the following answers will NOT protect him from a finding that he violated the business judgment rule: (a) The disinterested members of the board approved the transaction (b) The transaction was of minor importance to the company (c) The disinterested shareholders approved the transaction (d) The transaction was entirely fair to the corporation
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Answer: B.
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2. In the Lippman case involving a payout to the son and son-in-law: (a) The son-in-law was entitled to the payment because he represented the daughter’s interest in the company (b) The son-in-law was entitled to the payment because he had the same employment contract as the son. (c) The son-in-law was entitled to the payment because the business judgment rule protects corporate directors. (d) The son-in-law was not entitled to the payment.
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Answer: D.
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3. The duty of care: (a) Is not a requirement of the business judgment rule (b) Protects directors who make an uninformed decision if it was entirely fair to the company (c) Protects a decision that has a rational business purpose, even if the activity was illegal (d) Will not protect directors who make a decision that harms the company
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Answer: B
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4. Under the Williams Act: (a) If shareholders offer more stock than the bidder wants, it must purchase shares pro rata (b) Target companies must reveal the names of any shareholders who acquire more than 5 percent of its stock (c) A bidder must file a disclosure statement at least 24 hours before the tender offer begins (d) Once a shareholder has accepted a tender offer, she cannot withdraw it
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Answer: A.
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5. Takeovers are NOT regulated by: (a) Federal statute (b) Federal common law (c) State statutes (d) State common law
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Answer: B.
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4. Ulrick and Birger started an air taxi service in Berlin, Germany, under the name Berlinair, Inc. Birger was approached by a group of travel agents who were interested in hiring an air charter business to take German tourists on vacation. Birger formed Air Berlin Charter Co. (ABC) and was its sole owner. On behalf of ABC, he entered into a contract with the Berlin travel agents. Birger concealed his negotiations from Ulrick, even though he used Berlinair working time, staff, money, and facilities. Birger defended his behavior on the grounds that Berlinair could not afford to enter into a contract with the travel agents. Has Birger violated the corporate opportunity doctrine?
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Answer: Whether or not Berlinair could afford the opportunity, Birger had the obligation to offer it to the company
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1. The president of R. Hoe & Co., Inc., refused to call a special meeting of the shareholders although 55 percent of them requested it. One purpose of the meeting was to demand that the former president be reinstated. Do shareholders have the right to make these two requests? (a) Yes to both. (b) No to both. (c) The shareholders have the right to call a meeting but not to reinstate the president. (d) The shareholders have the right to reinstate the president but not to call a meeting.
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Answer: C.
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2. Under SOX and Dodd-Frank: (a) Companies are prohibited from making personal loans to directors and officers. (b) If a company restates its earnings, the five top executives must reimburse the company for any income they have received during that period. (c) All directors must be independent. (d) Shareholders have the right to strike down golden parachutes.
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Answer: A.
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3. A company is allowed to hold its annual meeting online: (a) If a majority of its shareholders approve (b) If it also hold a live meeting for shareholders who want to attend in person (c) If it simulcasts a video of the meeting (d) Any way it wants, as long as shareholders are notified
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Answer: D.
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4. To be elected to a board of a publicly-traded company, a candidate must: (a) Receive a majority of the votes cast (b) Receive a majority vote of the shares outstanding (c) Receive a plurality of the votes cast (d) Receive a plurality of the shares outstanding
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Answer: C.
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5. If directors and officers cause harm to their company: (a) Shareholders have the right to file suit against them and recover damages (b) Shareholders have the right to file suit against them and recover damages only if the board permits the suit (c) Shareholders have the right to file suit against them and recover damages only if the board permits the suit or a court deems the suit futile (d) Shareholders do not have the right to file suit against them
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Answer: C.
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4. When Classic Corp. went public at $12 a share, its waterbed business was floating along nicely—the company had annual sales of $23 million and turned a hefty profit. The company then sprang a leak and suffered through many years of losses. Isaac, who owned 64 percent of the stock, decided to take the company private again (by buying shareholders’ stock) at a price of 20 cents a share. Classic hired two financial advisers who opined that the buyout price was fair. The board of directors voted in favor of the sale and then scheduled a special shareholder meeting to vote on the buyout. Do the minority shareholders have any rights?
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Answer: Fogel also notified shareholders that, under Maryland law, they were entitled to exercise “dissenters’ rights.” They could object to the buyout and have the value of their stock set by an appraiser appointed by the court
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5. Shareholders lost their gamble when they bought stock of Jackpot Enterprises, Inc. Fed up with management, a shareholder asked the company to include a proposal in the proxy statement that would require the board of directors to sell or merge the company. Must Jackpot include this proposal in its proxy statement?
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Answer: The company argued that the proposal could be excluded because it related to ordinary business operations. The SEC disagreed
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1. Pfizer Inc. paid $2.3 billion to settle civil and criminal charges alleging that it had illegally marketed 13 of its most important drugs. This settlement made history, but not in a good way. It was both the largest criminal fine and the largest settlement of civil health care fraud charges ever paid. Shareholders filed a derivative suit against the Pfizer board and top executives. Defendants responded with a motion to dismiss on the grounds that shareholders had not made demand on the board. Is demand necessary?
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Answer: The court excused demand because the Complaint alleged “misconduct of such pervasiveness and magnitude, undertaken in the face of the board’s own express formal undertakings to directly monitor and prevent such misconduct, that the inference of deliberate disregard by each and every member of the board [was] entirely reasonable.” In short, the board was so careless in exercising its responsibilities that demand would be futile.

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