Exam 11: Corporations

To what does the term "due diligence" refer?

Joe, along with two friends, bought a peat bog with the idea of incorporating a corporation and reselling it to promote the development of the peat bog. Joe bought the bog for $40,000 and, when the corporation was incorporated, had himself and his two friends named as directors. They then held a meeting and on the first order of business, they bought the bog from themselves for $500,000. Then they voted to sell all of the shares of the business to five interested businessmen for $500,000, based on the value of the sole asset of the corporation, the peat bog. When the businessmen found out what had happened, they sued Joe and his friends. Explain the nature of the complaint and the likely outcome.

Three classmates incorporated about a week after graduation. The authorized capital was 500,000 common no-par-value shares. Each took one share and each was a director. If the directors decide to issue more shares from the treasury to raise more capital, which of the following provisions ensures that they keep their proportionate holdings?

Explain the concept of a promoter.

The corporation typically makes a debt commitment to a ________, who then issues shares in the indebtedness to individual bondholders.

Ethan got together with a number of friends who all sat on the board of directors of a corporation. They personally disliked Stephen, a minority shareholder with a bad attitude. A new proposal was being put to the board. While they knew that this was not a measure that was in the best interests of the corporation, they also knew it would seriously weaken Stephen's financial position. Accordingly, they voted in favour of it. Which of the following is true?

Discuss the process of incorporation in your jurisdiction, including practical tips for maximizing the advantages offered by this form of business organization.

Lee, a former head of a venture capital firm, sat on the board of directors of Angel Enterprises Ltd., a broadly held corporation. During a board meeting, she recommended that the corporation invest in a new technology start-up. Lee failed to mention that she owned shares in this new tech corporation. When the prospect of investing was put to the board, Lee voted in favour it. Read each of the following statements separately and choose the true statement.

Long ago, your friend Harry became wealthy through the tremendous success of a gadget he designed that allowed microchips to be produced without being touched by humans. Ever since, he has been invited to sit on the board of directors of different corporations, and has now decided it is time to accept. 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?

Explain the significance of a personal guarantee.

In Peoples Department Stores Inc. et al. v. Wise et al., the Supreme Court of Canada had to clarify to whom a director owes its duties. What did the Court hold?

Explain the nature of an annual general meeting.

An agent owes a fiduciary duty to his principal, a director owes a fiduciary duty to the corporation, and 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?

There is one common method of creating corporations used across Canada.

What does it mean to be a closely held corporation?

Because a director of a closely held corporation breached his duties to the corporation, the corporation lost $15,000. Despite the urging of the shareholders, the board of directors refused to begin an action on behalf of the corporation. Which one of the following provisions would aid the shareholders?

Explain why a corporation is referred to as a legal fiction.

Aunt Juliet wants to incorporate a small closely held corporation. Which of the following bits of advice, given to her by friends, is False?

A corporation is a fiction that does not exist in reality.

A person who participates in the initial setting up of a corporation or who assists the corporation in making a public share offering is known as promoter.