MGO 403 EXAM 1QUESTIONS & ANSWERS
What does the scope of limited liability in a corporation mean? - answer -that owners
have limited liability, owners are not personally liable for the debts of the corporation, in
general
Why might a lender insist on a personal guarantee (or collateral) from an owner when
the borrower has limited liability status? - answer --if you form a corp as an individual,
and you wanted to borrow money from a bank, and you came to them and asked to
borrow as acme corp, the bank may not want to give money to you as the owner
because you have limited liability.
-when the bank does give you the money as the corp, they want the personal guarantee
that they will pay it back
Pierce the corporate veil - answer -if a corporation is perpetuating fraud, the corporate
form will not be recognized and the owners can be found personally liable
Corporate governance - answer -who has the power and responsibility
What do shareholders do? - answer -elect bod
What does the bod do? - answer -appoint/hire management
What does management do? - answer -have the most day-to-day control of the
corporation
Friedman on csr - answer -does not believe in csr...he thinks its all a marketing
campaign to make more money
Close corporation - answer -only a few sh and not publicly traded stock
Dual-class structure - answer --issuing various types of shares by a single company
-class a & class b shares: class a has a significant amount of voting power
Inside director - answer -ceo & on the bod
-can relay info that managers want to the bod
-know day-to-day operations
-personal relationship w bod
-problem with checks & balances
Who are the principal & agent and what is the principal agent problem - answer --
principal: sh
-agent: bod, executive officers, employees
P&a problem: goal conflicts between the two
, What is an ipo - answer -initial public offering: first sale of a stock that a corporation
sells to the public
Selling stocks: primary market - answer -corp wants to sell stocks to raise $ -->
underwriters buy all stocks from the corporation
Selling stocks: secondary market - answer -underwriter buys all stocks from a
corporation --> underwriter sells stocks to other investor on exchange (any sale after
shares are sold to the underwriter)
Bought deal - answer -most often ipo, goes to a group of banks called underwriters
Role of government regulators in setting disclosure rules - answer -goal of these laws is
to protect investors from information asymmetry problems that are inherent in the
modern public corporations form
What was hong kong's rule on companies having dual class structure at the time
alibaba wanted to list its ipo? - answer -they did not allow dual class shares
Fiduciary duty - answer --legal relationship between sh/corp and its managers/directors
-to act in the best interest of the principle
-if there is a breach, this gives sh a right to sue manager/director
Business judgement rule - answer -a corporate director or officer will not be liable to the
corporation or to its shareholders for honest mistakes of judgement and bad business
decisions
-not protect a manager/director if: breach of duty of loyalty, breach of duty of care
Duty of loyalty - answer -in agency law, the obligation an agent has to put the interests
of the principal before the interests of the agent in matters related to the agency
relationship.
Duty of care - answer -information to give the best decisions for the company
What is a "compensation committee"? - answer --does not include inside director
-determines his pay
-bod forms without inside director
What is a "golden parachute"? - answer --large compensation package for the ceo
What percentage of the s&p 500 has some type of severance package for
management? - answer -about 80%
Ceo fired "for cause" vs "without case" - answer -for cause: no severance package
goes to the ceo
Without cause: severance package awarded to ceo
What does the scope of limited liability in a corporation mean? - answer -that owners
have limited liability, owners are not personally liable for the debts of the corporation, in
general
Why might a lender insist on a personal guarantee (or collateral) from an owner when
the borrower has limited liability status? - answer --if you form a corp as an individual,
and you wanted to borrow money from a bank, and you came to them and asked to
borrow as acme corp, the bank may not want to give money to you as the owner
because you have limited liability.
-when the bank does give you the money as the corp, they want the personal guarantee
that they will pay it back
Pierce the corporate veil - answer -if a corporation is perpetuating fraud, the corporate
form will not be recognized and the owners can be found personally liable
Corporate governance - answer -who has the power and responsibility
What do shareholders do? - answer -elect bod
What does the bod do? - answer -appoint/hire management
What does management do? - answer -have the most day-to-day control of the
corporation
Friedman on csr - answer -does not believe in csr...he thinks its all a marketing
campaign to make more money
Close corporation - answer -only a few sh and not publicly traded stock
Dual-class structure - answer --issuing various types of shares by a single company
-class a & class b shares: class a has a significant amount of voting power
Inside director - answer -ceo & on the bod
-can relay info that managers want to the bod
-know day-to-day operations
-personal relationship w bod
-problem with checks & balances
Who are the principal & agent and what is the principal agent problem - answer --
principal: sh
-agent: bod, executive officers, employees
P&a problem: goal conflicts between the two
, What is an ipo - answer -initial public offering: first sale of a stock that a corporation
sells to the public
Selling stocks: primary market - answer -corp wants to sell stocks to raise $ -->
underwriters buy all stocks from the corporation
Selling stocks: secondary market - answer -underwriter buys all stocks from a
corporation --> underwriter sells stocks to other investor on exchange (any sale after
shares are sold to the underwriter)
Bought deal - answer -most often ipo, goes to a group of banks called underwriters
Role of government regulators in setting disclosure rules - answer -goal of these laws is
to protect investors from information asymmetry problems that are inherent in the
modern public corporations form
What was hong kong's rule on companies having dual class structure at the time
alibaba wanted to list its ipo? - answer -they did not allow dual class shares
Fiduciary duty - answer --legal relationship between sh/corp and its managers/directors
-to act in the best interest of the principle
-if there is a breach, this gives sh a right to sue manager/director
Business judgement rule - answer -a corporate director or officer will not be liable to the
corporation or to its shareholders for honest mistakes of judgement and bad business
decisions
-not protect a manager/director if: breach of duty of loyalty, breach of duty of care
Duty of loyalty - answer -in agency law, the obligation an agent has to put the interests
of the principal before the interests of the agent in matters related to the agency
relationship.
Duty of care - answer -information to give the best decisions for the company
What is a "compensation committee"? - answer --does not include inside director
-determines his pay
-bod forms without inside director
What is a "golden parachute"? - answer --large compensation package for the ceo
What percentage of the s&p 500 has some type of severance package for
management? - answer -about 80%
Ceo fired "for cause" vs "without case" - answer -for cause: no severance package
goes to the ceo
Without cause: severance package awarded to ceo
