The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. Where does a committee get its
authority?
It is from the board of directors that
appoints the committee.
Who is ultimately responsible for the acts
of the committee?
The board of directors

2. What are the three types of duties a
director owes to the corporation?
• Fiduciary duty
• Duty of care
• Duty of loyalty

3. If a board of directors, exercising due
care, makes a poor business decision that
results in a substantial financial loss to
the corporation, can the shareholders of
the corporation look to the directors’
personal assets to recover their damages?
No, directors cannot be held personally
accountable for their poor business
decisions if they are exercising due care.
What if one director withheld
information from the other directors and
personally benefited from the decision?
Yes, a director who acts contrary to the
best interest of the corporation,
withholds information from the other
directors, and personally benefits from
the decision breaches his or her fiduciary
duty and may be held personally liable
for damages to the shareholders.

4. Suppose that Albert is on the board of
directors of Acme Sailboard Company,
Inc. As the result of a contract dispute,
Acme Sailboard Company, Inc. and
Albert are both named in a lawsuit
brought by one of the company’s
suppliers. If Albert is found at the trial to
be innocent of any wrongdoing, who is
responsible for paying his attorney’s fees
and legal expenses?
Acme Sailboard Company, Inc. would
be responsible for Albert’s attorney’s
fees and legal expenses. State statutes
and Section 8.52 of the Model Business
Corporation Act generally provide
that corporations must indemnify
directors who successfully defend
themselves in lawsuits in which they
are named due to their position as
corporate director.
What if it is determined at trial that there
has been an illegal conversion of funds
by Albert that resulted in the lawsuit?
Albert would be responsible for his
own fees. State statutes modeled after
Section 8.51 of the Model Business
Corporation Act provide that directors
are not to be indemnified for expenses
incurred for defending themselves in
proceedings involving their own
wrongdoing, unless ordered by a court.

5. Can a corporation incorporated under a
state following the MBCA consist of one
individual who is an officer, director, and
shareholder?
Yes

6. Must all corporations have a board of
directors?
No, in some states statutory close
corporations are often not required to
have a board of directors.

7. Who typically elects the officers of the
corporation?
The board of directors

8. Under the MBCA, what is the minimum
number of votes required to pass a
resolution of the shareholders if 1,000
shares of the corporation’s stock have
been issued?
The vote of 501 shares of stock would
be required to pass most resolutions,
unless a different number is prescribed
by statute or the corporation’s articles
of incorporation.

9. If the shareholders of a corporation feel
that their stock has lost its value due to the
mismanagement and/or misconduct of the
corporation’s officers and directors, what,
if any, recourse do they have?
If the shareholders of the corporation
are in agreement concerning the
mismanagement and misconduct of the
corporation’s officers and directors,
they may vote the directors out of
office and elect new directors they
trust. One or more shareholders may
also bring a derivative action on behalf
of the corporation if they feel that the
directors’ and officers’ mismanagement
and misconduct have been detrimental
to the corporation as a whole. Either
option requires that procedural steps
outlined in state statutes be followed.
10. Who typically benefits when cumulative
voting for the directors of a corporation is
allowed?
Minority shareholders who would not
otherwise have enough votes to elect a
director to represent their interests
typically benefit.