Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 411:

  Acorn and Bean were general partners in a farm machinery business. Acorn contracted, on behalf of the partnership, to purchase 10 tractors from Cobb Corp. Unknown to Cobb, Acorn was not authorized by the partnership agreement to make such contracts. Bean refused to allow the partnership to accept delivery of the tractors and Cobb sought to enforce the contract. Cobb will:

  A. Lose because Acorn's action was beyond the scope of Acorn's implied authority.

  B. Prevail because Acorn had implied authority to bind the partnership.

  C. Prevail because Acorn had apparent authority to bind the partnership.

  D. Lose because Acorn's express authority was restricted, in writing, by the partnership agreement.

  Correct Answer: C

  Choice "c" is correct. A general partner has apparent authority to bind the partnership and other partners in respect to all ordinary transactions within the apparent scope of the partnership business. A farm machinery business probably regularly purchases tractors. Thus, there was apparent authority here. Choices "a" and "b" are incorrect. Implied authority is authority that an agent reasonably believes he or she was given by the principal along with any express authority. Because Acorn knew that he did not have express authority to make the contracts here, he could not reasonably believe that he had implied authority to do so. Choice "d" is incorrect. The seller was not aware of Acorn's lack of express authority. Therefore, Cobb relied on Acorn's apparent authority.

• Question 412:

  The limited liability of the shareholders of a closely-held corporation will most likely be disregarded if the shareholders:

  A. Lend money to the corporation.

  B. Are also corporate officers, directors, or employees.

  C. Undercapitalized the corporation when it was formed.

  D. Formed the corporation solely to limit their personal liability.

  Correct Answer: C

  Choice "c" is correct. The "corporate veil" can be pierced in situations in which the corporation was undercapitalized at formation, where it is the alter ego of the shareholders, or when it used to perpetrate a fraud. Choice "a" is incorrect. Shareholders may lend money to their corporation. This does not make such shareholders personally liable for the corporation's debt. Choice "b" is incorrect. Officers, directors, and employees are not personally liable for the corporation's debt, and there is no reason to change this role merely because such persons also own shares. Choice "d" is incorrect. The desire to limit liability is a valid reason to adopt the corporate form and will not, by itself, allow the "corporate veil" to be pierced.

• Question 413:

  Grey and Carr entered into a written partnership agreement to operate a hardware store. Their agreement was silent as to the duration of the partnership. Grey wishes to withdraw from the partnership. Which of the following statements is correct?

  A. Unless Carr consents to a withdrawal, Grey must apply to a court and obtain a decree allowing withdrawal.

  B. Grey may not withdraw unless Carr consents.

  C. Grey may withdraw only after notice of the proposed dissolution is given to all partnership creditors.

  D. Grey may withdraw from the partnership at any time.

  Correct Answer: D

  Choice "d" is correct.

  Rule: Where a partnership agreement does not state the duration of the partnership, the partners may

  withdraw at any time. The partner need not obtain consent of the other partners or of the court.

  Choices "a" and "b" are incorrect, per the above rule.

  Choice "c" is incorrect. A partner has no duty to inform creditors of his intent to withdraw in order for the

  withdrawal to be effective (although notice is needed to limit the partner's personal liability).

• Question 414:

  The apparent authority of a partner to bind the partnership in dealing with third parties:

  A. Will be effectively limited by a formal resolution of the partners of which third parties are aware.

  B. Will be effectively limited by a formal resolution of the partners of which third parties are unaware.

  C. Would permit a partner to submit a claim against the partnership to arbitration.

  D. Must be derived from the express powers and purposes contained in the partnership agreement.

  Correct Answer: A

  Choice "a" is correct. This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction on the agent's authority, the third party cannot reasonably believe that the agent has the restricted authority. Choice "b" is incorrect. A formal resolution of the partners will not be effective to destroy authority if a third party is aware of the resolution, but not if the third party is unaware of the resolution. Choice "c" is incorrect. Submitting a claim to arbitration is an extraordinary act. A partner has apparent authority only to enter into transactions apparently carrying on in the usual way the business of the partnership. There is no apparent authority to enter into an extraordinary transaction. Choice "d" is incorrect. Apparent authority is derived from what a reasonable person believes concerning the authority of a partner based on the partnership's actions toward the third party; authority derived from the express powers and purposes contained in the partnership agreement is actual authority.

• Question 415:

  Under the Revised Model Business Corporation Act, which of the following actions by a corporation would entitle a stockholder to dissent from the action and obtain payment of the fair value of his/her shares?

  I. An amendment to the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it alters or abolishes a preferential right of the shares.

  II.

  Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the stockholder is entitled to vote on the plan.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: C

  Choice "c" is correct. "Both I and II."

  Rule: Shareholders who vote against a share exchange are entitled to payment for fair value of their

  shares.

  Rule: Preferred shareholders who dissent to having their preferential rights altered or abolished have

  dissenters' rights to be paid the fair value of their shares.

  Choices "a", "b", and "d" are incorrect, per the above rules.

• Question 416:

  Unless otherwise provided in a general partnership agreement, which of the following statements is correct when a partner dies?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Choice "d" is correct. "No - No - No." Upon the death of a general partner: Rule: A partner's death is an event of dissociation. Where a partner dissociates, the partner's right to participate in the management ceases; the partner's executor does not take the partner's place. Rule: The partner's estate remains liable for the partner's obligations to the partnership and has a right to the deceased partner's share of distributions. Rule: Under the Revised Uniform Partnership Act, a partnership does not automatically dissolve on the death of a partner; rather it will dissolve only if 90 days pass and the remaining partners do not wish to continue the partnership. Choices "a", "b", and "c" are incorrect, per the above rules.

• Question 417:

  In a member managed LLC, the apparent authority of a member to bind the LLC in dealing with third parties:

  A. Would permit a member to submit a claim against the LLC to arbitration.

  B. Must be derived from the express powers and purposes contained in the operating agreement.

  C. Will be effectively limited by a formal resolution of the members of which third parties are aware.

  D. Will be effectively limited by a formal resolution of the members of which third parties are unaware.

  Correct Answer: C

  Choice "c" is correct. This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction on the agent's authority, the third party cannot reasonably believe that the agent has the restricted authority. Choice "a" is incorrect. Submitting a claim to arbitration is an extraordinary act and so is not within a member's apparent authority. Choice "b" is incorrect. Apparent authority is derived from what the reasonable person believes is the authority of a member, not the express powers and purposes contained in the operating agreement. Choice "d" is incorrect. A formal resolution of the members will not be effective to destroy apparent authority if third parties are unaware of the resolution.

• Question 418:

  Generally, a merger of two corporations requires:

  A. That a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both corporations.

  B. Unanimous approval of the merger plan by the stockholders of both corporations.

  C. Unanimous approval of the merger plan by the boards of both corporations.

  D. That all liabilities owed by the absorbed corporation be paid before the merger.

  Correct Answer: A

  Choice "a" is correct. The merger of two corporations requires that a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both companies. A merger generally requires the approval of both the directors and stockholders. Choice "b" is incorrect. While the stockholders' approval is required, in most states a majority vote is required; no state requires a unanimous vote. Choice "c" is incorrect. While the board's approval is required, a majority vote and not a unanimous vote is required. Choice "d" is incorrect. There is no requirement that all liabilities owed by the absorbed corporation be paid before the merger because the merged corporation becomes obligated to pay such liabilities upon the merger.

• Question 419:

  A stockholder's right to inspect books and records of a corporation will be properly denied if the stockholder:

  A. Wants to use corporate stockholder records for a personal business.

  B. Employs an agent to inspect the books and records.

  C. Intends to commence a stockholder's derivative suit.

  D. Is investigating management misconduct.

  Correct Answer: A

  Choice "a" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. This right will be properly denied where the purpose is not reasonably related to their status as a shareholder. Choice "b" is incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. A shareholder need not conduct the inspection personally; a shareholder may send an agent such as an attorney or an accountant. Choices "c" and "d" are incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. Choices "c" and "d" are purposes reasonably related to the shareholder's status as a shareholder. Thus, the stockholder would have a right to inspect for those reasons.

• Question 420:

  Price owns 2,000 shares of Universal Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paid. If Universal is dissolved, which of the following statements is correct?

  A. Universal will be liable to Price as an unsecured creditor for $10,000.

  B. Universal will be liable to Price as a secured creditor for $20,000.

  C. Price will have priority over the claims of Universal's bond owners.

  D. Price will have priority over the claims of Universal's unsecured judgment creditors.

  Correct Answer: A

  Choice "a" is correct. After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other "unsecured" debts. Choice "b" is incorrect. The unpaid dividend ranks as an "unsecured" not a "secured" debt and Price has no right to a dividend for the second year because no dividend was declared that year. Choice "c" is incorrect. As an "unsecured" creditor, Price does not have priority over the company's bondholders. Choice "d" is incorrect. The "unsecured" creditors will share in the "unsecured" category as a whole and not with any priority within the class.