D216 Business Law for Accountants - Set 4 - Part 3

Correct Answer: Common stock

Common stock carries voting rights, typically one vote per share, and common shareholders elect directors and share in dividends while standing last on dissolution. Those exact features, especially the vote, identify the class as common stock. Option b is incorrect because preferred stock usually carries no voting rights, trading the vote for priority on dividends and on dissolution. The owners specifically want to elect directors, so common stock, not preferred, matches what they seek. Option c is incorrect because a corporate bond is a debt security whose holder is a creditor, not a voting owner. The owners want equity carrying a vote, which is common stock, so a bond simply cannot satisfy their goal. Option d is incorrect because a debenture is unsecured corporate debt, and its holder lends money rather than owning any shares. Lending confers no vote at all, whereas these owners seek voting equity, which only common stock supplies.

Correct Answer: Piercing the corporate veil

Piercing the corporate veil lets a court ignore the corporate form and impose personal liability on shareholders when the corporation is used to perpetrate fraud or another illegitimate objective. The fraudulent alter-ego use here is the classic trigger. Option a is incorrect because the business judgment rule shields careful, good-faith directors from liability for honest mistakes; it is a defense, not a basis for reaching shareholders. Fraudulent abuse of the entity calls for piercing the veil instead. Option b is incorrect because ultra vires concerns acts beyond the corporation's powers, remedied by injunction or action against an officer. It does not target shareholders who used the entity to defraud creditors; veil-piercing reaches those owners personally. Option c is incorrect because the duty of cooperation is an agency-law obligation a principal owes an agent, unrelated to shareholder liability for fraud. Reaching the owners of a corporation used to defraud creditors is done by piercing the veil.

Correct Answer: More than fifty percent of ownership

A quorum requires more than fifty percent of the shares entitled to vote to be represented, in person or by proxy, before the meeting can transact business. Without that majority present, the shareholders cannot validly act, which the chair applies. Option b is incorrect because one-third is below the required threshold for a quorum. The rule calls for more than half of the voting ownership to be represented, so a one-third showing falls short and the meeting cannot act. Option c is incorrect because a quorum does not demand that every share be represented. Requiring unanimity would make meetings nearly impossible; the standard is simply a majority, more than fifty percent of the voting ownership present. Option d is incorrect because a lone attendee generally cannot constitute a quorum unless that person represents a majority of shares. The quorum measures share representation, more than fifty percent, not the number of individuals who appear.

Correct Answer: The officers of the corporation

Officers are hired by the board and run the corporation's day-to-day operations as its employees and agents. In the governance chain, shareholders elect directors and directors hire officers, but the officers are the ones handling daily operations. Option a is incorrect because shareholders own the corporation and elect directors but do not run daily operations. Their governance role is choosing the board, not managing the business, so day-to-day operations rest with the officers, not owners. Option b is incorrect because the state incorporation office merely processes formation filings and never operates the business. Daily operations are handled internally by the officers, so an external government office plays no management role here. Option c is incorrect because the board sets overall policy and hires officers but does not itself run daily operations. Directors oversee and direct; the officers they hire carry out the day-to-day management, making officers the correct answer.

Correct Answer: The business judgment rule

The business judgment rule shields directors who exercise due care, acting in good faith, on an informed basis, and in the corporation's best interest, from liability for honest mistakes or bad outcomes. The careful, good-faith decision is protected despite failing. Option a is incorrect because ultra vires concerns acts beyond the corporation's powers, not honest decisions that turn out badly. Launching a product line is within corporate powers, so the protection for a careful but unsuccessful choice lies elsewhere. Option b is incorrect because the duty of loyalty forbids self-dealing and conflicts, and nothing suggests the directors profited personally. Their good-faith, informed decision is protected by the business judgment rule, which addresses honest mistakes of judgment. Option d is incorrect because respondeat superior is an agency doctrine making a principal liable for an agent's torts within the scope of employment. It does not govern directors' liability for business decisions; the business judgment rule shields them.

Correct Answer: Foreign corporation needing certificate of authority

A corporation doing business in a state other than its state of incorporation is a foreign corporation and must obtain a certificate of authority to operate there. Formed elsewhere but operating in the neighboring state, this company needs that certificate. Option a is incorrect because an alien corporation is one formed in another country, not another state, and there is no naturalization for corporations. A company from a sister state is instead a foreign corporation, not alien. Option b is incorrect because the company is domestic only in its own state of incorporation. In the neighboring state it operates as an out-of-state entity that must obtain a certificate of authority, not simply proceed freely. Option c is incorrect because a public corporation is government-owned for a public purpose, which this private company is not. Crossing state lines makes it a foreign corporation needing a certificate, not a public entity seeking approval.

Correct Answer: An inside director

An inside director is a director who also holds a management position, such as an officer, and is involved in running the company. Because this person is both a board member and the president, the classification is inside director. Option b is incorrect because an outside director holds no management position and offers only independent oversight, which describes the second board member, not the first. Someone serving as both director and president is an inside director instead. Option c is incorrect because a limited partner is a passive investor in a limited partnership, an entirely different business form. This scenario involves a corporation's board, so the president who also sits on the board is an inside director. Option d is incorrect because a registered agent merely receives legal documents for the corporation and is not a governance role. A board member who is also the president is an inside director, unrelated to service of process.

Correct Answer: Preferred shareholders have priority over common

On dissolution, preferred shareholders have priority over common shareholders for distributions, and common shareholders, the residual owners, stand last. So after creditors are paid, preferred outranks common in distributing the remaining corporate assets. Option a is incorrect because it reverses the correct order. Preferred stock carries dissolution priority, so preferred shareholders are paid before common, and the common shareholders, as residual owners, come last rather than ahead of preferred. Option b is incorrect because the two classes do not share equal timing on dissolution. Preferred stock's defining advantage includes priority over common in distributions, so preferred is paid ahead of common rather than simultaneously with it. Option c is incorrect because common shareholders are not the only recipients; they are actually last in line. Preferred shareholders have priority and are paid first among owners, with common receiving only what remains after preferred is satisfied.

Correct Answer: A preemptive right

A preemptive right, when provided in the articles, gives a shareholder the first chance to buy newly issued shares in proportion to current holdings, preserving ownership percentage and avoiding dilution. That description matches the preemptive right exactly. Option a is incorrect because a proxy is authorization for someone else to vote a shareholder's shares, not a right to buy new stock. It concerns voting by a stand-in, so it does not describe an anti-dilution purchase right. Option b is incorrect because a quorum is the minimum share representation needed to transact business at a meeting, more than half the voting ownership. It has nothing to do with buying new shares, so it cannot name this right. Option d is incorrect because a benefit enforcement proceeding is a benefit corporation remedy for failing to pursue a stated public benefit. It is unrelated to purchasing newly issued shares, so it does not describe the preemptive right at issue.

Correct Answer: A professional corporation

A professional corporation is formed by licensed professionals, such as accountants, lawyers, and physicians, who incorporate their practice, and it is identified by designations like P.C., S.C., or P.A. The accountants' incorporated practice is a professional corporation. Option a is incorrect because a public corporation is owned by a government and formed for a public or political purpose, such as a postal service or a city. Licensed accountants incorporating their private practice form a professional corporation instead. Option c is incorrect because an alien corporation is one formed in another country doing business in the United States, a classification by origin. It says nothing about a licensed practice, so the accountants' entity is a professional corporation. Option d is incorrect because a nonprofit corporation is organized for a purpose other than making a profit, like a charity or school. A licensed accounting practice operates for profit, so it forms a professional corporation, not a nonprofit.