10 Corporate law

Which of the following is a criterion for a court piercing the corporate veil?

• A) There is a judgment against the corporation that remains unpaid

• B) The company is a mere sham of another entity and fraud or conduct similar to fraud is involved.

• C) Unless this is done, creditors of the company will suffer hardship

• D) The shareholders of the company have been adjudged bankrupt.

• E) The corporation has refused to pay a debt

Seven college friends decide to incorporate their business. The business’s financial position steadily deteriorates and it soon becomes unable to pay its debts. In total, the company owes its creditors $500,000 but has assets of only $10,000. Who  or what can the creditors successfully recover against?

• A) The shareholders of the company

• B) the directors of the company.

• C) both the company and its owners

• D) the corporation

• E)  the managers of the company

Which of the following is a characteristic of common shares?

• A) They have voting rights for directors

• B) They carry a preferential right to distribution of assets on breakup.

• C) They carry veto rights in annual general meetings of the company

• D) They allow for the payment of lower rates of withholding tax on declared dividends

• E) They attract a greater amount of dividend

Which of the following is a characteristic of preference shares?

• A) They carry multiple voting rights

• B) They attract a greater amount of dividend

• C) They allow for the payment of lower rates of withholding tax on declared dividends

• D) They have priority over common shareholders in the corporation’s assets when the company is dissolved.

• E) All of the above.

Kim Phu and Joey Pantalone form a partnership. Kim and Andy Tortellini form a corporation. Kim dies. Which of the following is TRUE?

• A) Only the partnership is dissolved

• B) Only the corporation is dissolved

• C) Both the corporation and the partnership are dissolved

• D) Neither the corporation nor the partnership is dissolved

• E) Andy and Joey become partners.

) You purchase 50 of the 50,000 issued shares of Trainco Ltd, for $100. The company goes bankrupt. Creditors claim $5,000,000. How much is your liability?

• A) All you lose is the $100 investment you made

• B) $5,000

• C) $5,000,000

• D) It depends on whether the creditors decide to sue you.

• E) Zero, since your investment is a first claim on the assets of the corporation.

When a private corporation decides to sell its shares to the public for the first time it is called:

• A)  a prospectus

• B)  an IPO (initial public offering)

• C)  a share transfer

• D)  share capital

• E)   insider trading

Lisa Larue operated a beauty parlour under the name You Look Marvelous. Initially it was a sole proprietorship, but after being in business for a year, Lisa decided to incorporate as YLM Ltd. The bank with which she had been dealing for the past year demanded that she now sign a demand promissory note, which she did, as “Lisa Larue”. When the note was not paid by YLM, the bank sued Lisa personally. Which of the following is TRUE?

• A) Lisa is not liable. The whole point of incorporating was to obtain limited liability.

• B) Lisa is liable because she did not make clear in the note that she was signing on behalf of YLM Ltd.

• C) Lisa is not liable because the bank knew that Lisa had incorporated and therefore intended not to assume personal liability for the business’s debts.

• D) Lisa is liable because she is the sole shareholder

• E)  Lisa is not liable as the promissory note is void due to mistake

Which of the following right does a shareholder in a corporation possess?

• A) The automatic right to a dividend if the corporation makes a profit that year.

• B) The right to a dividend only if the board of directors declare a dividend

• C) The right to attend the corporation’s annual general meeting

• D) Both B and C

• E) Both A and C

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

• A) The directors of a corporation refuse to give a pay raise to the employees although they have not received one for five years.

• B) A director makes a profit of $120,000 from a contract between the corporation and a firm in which he has an interest after he has made full disclosure of his interest to the board of directors and abstained from the vote on the contract.

• C) An officer of a corporation learns of a business opportunity intended for the company and intercepts it for his own benefit

• D) The directors refuse to declare dividend contrary to a request by its preferred shareholders.

• E) A shareholder owning 2% of the outstanding shares starts a business in direct competition with a corporation in which he holds shares.