Duties in Close Corporations

Question 1

In responding to dissension in close corporations, courts in Delaware have generally:

1. adopted the same approach as those in Massachusetts
2. analogized the relationship among close corporation participants to that of partners, holding shareholders to high standards of fairness
3. held that when business participants adopt the corporate form, they also agree to the traditional norms of corporation law, including centralized management and majority rule
4. analogized the relationship among close corporation participants to that of ESOP participants, requiring treatment akin to partnership and use of the business affairs rule
5. held that corporation participants agree to statutory norms of corporation law, including equal management rights, equal shares in profits, and minority rule

Answer 1

3. held that when business participants adopt the corporate form, they also agree to the traditional norms of corporation law, including centralized management and majority rule

Question 2

In Wilkes v. Springside Nursing Home, Inc., the court ruled that:

1. shareholders in close corporations owe each other a duty of utmost good faith and loyalty (like partners)
2. if challenged by a minority shareholder, a controlling group must show a legitimate business objective for its action
3. the three majority shareholders breached their fiduciary duties to Wilkes with the freeze-out
4. if a controlling group shows a business interest for its action, a plaintiff minority shareholder can still win if he shows that the controlling group could have accomplished the business objective in a manner that harmed him less
5. All of the above

Answer 2

5. all of the above

Question 3

An ESOP is:

1. a beloved character in the Winnie The Pooh books who adopts a somewhat pessimistic view of life
2. a retirement plan in which the company contributes its stock to the plan for the benefit of the company’s employees
3. a method by which employees purchase the company, usually to avoid dissolution or liquidation
4. a form of executive compensation which is pegged to performance in order to maximize tax deductibility
5. a plan which gives employees the right (or option) to buy their company’s stock at a set price within a certain period of time

Answer 3

2. a retirement plan in which the company contributes its stock to the plan for the benefit of the company’s employees

Question 4

The Delaware approach to minority shareholder rights:

1. creates “line-drawing” issues for courts
2. requires courts to seek ex post to approximate the parties’ expectations
3. has been characterized as an “equal opportunity” approach
4. has been characterized as a “traditional” approach
5. 2 and 4 only

Answer 4

4. has been characterized as a “traditional” approach

Question 5

In Nixon v. Blackwell, the court ruled that

1. Shareholders were entitled to fair treatment under Delaware General Corporations Law, but not to equal treatment under the ESOP plan.
2. Management buyouts triggered application of the “fair and equal treatment” doctrine
3. Shareholders were entitled to equal treatment under Delaware General Corporations Law, but not to fair treatment under the ESOP plan.
4. A corporation does not have to elect to become a close corporation in order to governed by the provisions of the Delaware General Corporations Law subchapter governing “Close Corporations: Special Provisions”
5. 1 and 4 only

Answer 5

1. Shareholders were entitled to fair treatment under Delaware General Corporations Law, but not to equal treatment under the ESOP plan

Question 6

A “freeze-out”

1. is an action taken by a firm’s majority shareholders to cut the minority holders out of the decision making process so that the minority voting rights are useless
2. may pressure minority holders to sell their stakes in the company.
3. may involve tactics such as the termination of minority shareholder employees or the refusal to declare dividends
4. may also be known as a “squeeze-out”
5. all of the above

Answer 6

5. all of the above

Question 7

An arrangement in which, before selling to outsider, a shareholder must give the corporation and/or the remaining shareholders a chance to buy the shares at the price being offered by the outsider is known as a

1. first option
2. sale option
3. buy-sell agreement
4. right of first refusal
5. consent requirement

Answer 7

4. right of first refusal

Question 8

An arrangement in which the corporation and/or the remaining shareholders have to buy the shares of withdrawing shareholders if a specified event happens (usually at a price set by a previously agreed formula) is known as a

1. first option
2. sale option
3. buy-sell agreement
4. right of first refusal
5. consent requirement

Answer 8

3. buy-sell agreement

Question 9

A firm’s value based on the cost of its assets listed on its balance sheet, minus the allowed depreciation of the firm’s fixed assets, minus its liabilities, is known as the firm’s:

1. capitalized earnings
2. book value
3. appraisal
4. right of first refusal
5. market valuation

Answer 9

2. book value

Question 10

wholly owned subsidiary

Answer 10

you own all of the shares in the subsidiary

Question 11

partially owned subsidiary

Answer 11

own enough shares to control it

Question 12

De jure means you own

Answer 12

more than half of it

Question 13

defacto mean you own

Answer 13

a significant block