I85PREP
⌘ K
Applied Corporate Law study materials
Applied Corporate Law study resources

Applied Corporate Law practice questions

One question at a time. Build your Applied Corporate Law understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Corporate Law

Which feature most clearly distinguishes a public company from a private company in corporate law?

  1. It must appoint an auditor annually.
  2. It must hold an annual general meeting.
  3. It must have at least two directors.
  4. It may offer its shares to the general public. Correct answer.

Explanation

The defining legal characteristic of a public company is that its constitution permits it to raise capital by offering securities to the public, which triggers heavier disclosure and listing obligations. Private companies are prohibited from public offers. The other features listed are obligations that can apply to both types.

Question 2Corporate Law

A promoter signs a contract on behalf of a company that has not yet been incorporated. Under the common law position, who is generally liable on that contract?

  1. The promoter personally. Correct answer.
  2. The future company automatically.
  3. The company's intended directors jointly.
  4. No one, because the contract is void.

Explanation

At common law a company cannot ratify a pre-incorporation contract because it did not exist when the contract was made, so the promoter who contracted is personally liable unless the parties agree otherwise. Statutory provisions in many jurisdictions allow the company to adopt such contracts after incorporation, but absent adoption the promoter remains bound.

Question 3Corporate Law

What is the core legal effect of the doctrine of separate legal personality?

  1. Directors own the company's assets in trust for shareholders.
  2. The company is treated as a person distinct from its shareholders. Correct answer.
  3. Shareholders are personally liable for company debts.
  4. The company dissolves when a majority shareholder dies.

Explanation

Separate legal personality means the company has its own legal identity, rights, and liabilities distinct from those of its members and managers. This underpins limited liability and perpetual succession. Courts pierce the veil only in exceptional circumstances such as fraud or sham structures.

Question 4Corporate Law

In which situation is a court most likely to pierce the corporate veil?

  1. When directors and shareholders are different people.
  2. When the company has only one shareholder.
  3. When the company is used as a mere facade to evade existing legal obligations. Correct answer.
  4. When the company earns unusually high profits.

Explanation

Veil piercing is exceptional and typically reserved for cases where the corporate form is abused, for example as a sham or facade to evade legal duties or commit fraud. Single-member companies, profitability, and role separation are ordinary and lawful features that do not justify disregarding personality.

Question 5Corporate Law

What does the duty of care and skill generally require of a director?

  1. The degree of care a reasonably diligent person would exercise in comparable circumstances. Correct answer.
  2. Absolute guarantee that no business decision ever fails.
  3. Deference to the majority shareholder on every decision.
  4. Personal liability for all losses suffered by the company.

Explanation

The duty of care and skill is measured objectively, and often subjectively as well, by reference to the care, diligence, and skill a reasonable person would exercise in similar circumstances. It does not impose strict liability for losses. The business judgment rule may protect informed, good-faith decisions.

Question 6Corporate Law

A director learns of a corporate opportunity that her company could pursue, but the company lacks funds. She takes the opportunity for herself without disclosure. Which duty is most directly engaged?

  1. The duty to convene board meetings monthly.
  2. The duty to file tax returns on time.
  3. The duty to maintain the share register.
  4. The duty to avoid conflicts of interest and not profit from position. Correct answer.

Explanation

Directors owe a fiduciary duty not to place themselves in a position of conflict and not to exploit corporate opportunities or information for personal gain without proper disclosure and consent. Lack of company funds does not automatically free the opportunity for personal capture. Full disclosure to and approval by the board is the usual safeguard.

Question 7Corporate Law

What is the primary purpose of the business judgment rule?

  1. To require shareholder approval for every transaction.
  2. To guarantee directors a fixed salary.
  3. To protect informed, good-faith decisions made with loyalty from hindsight liability. Correct answer.
  4. To shield directors from liability for fraud.

Explanation

The business judgment rule creates a presumption that directors acted on an informed basis, in good faith, and in the honest belief that the decision served the company. It prevents courts from second-guessing reasonable risk decisions with hindsight. It does not protect fraud, bad faith, or conflicts of interest.

Question 8Corporate Law

Which statement best describes the duty of good faith owed by directors?

  1. They must maximize short-term profit in every quarter.
  2. They must always follow instructions from the largest creditor.
  3. They must disclose confidential information to competitors.
  4. They must act honestly in what they believe to be the company's best interests. Correct answer.

Explanation

Good faith requires subjective honesty: directors must act in the genuine belief that their conduct serves the company's interests. This is assessed alongside the objective duty to promote the company's success. It does not require obeying creditors or maximizing short-term profit regardless of long-term harm.

Question 9Corporate Law

When may a director vote on a board resolution in which she has a material personal interest?

  1. Only where the interest is properly disclosed and the constitution or statute permits participation. Correct answer.
  2. Never, under any circumstances.
  3. Only if the majority shareholder gives verbal approval.
  4. Always, because directors are entitled to vote on all matters.

Explanation

A director with a material personal interest generally must disclose it and abstain unless the governing statute or constitution allows participation after disclosure. The rule prevents self-interested decision-making. Verbal approval from a shareholder is insufficient where formal procedures are prescribed.

Question 10Corporate Law

What is the usual consequence when a company issues shares at a discount to their nominal value?

  1. The issue is generally treated as invalid or the allottee may be liable for the discount. Correct answer.
  2. The issue is automatically valid and no liability arises.
  3. The discount is treated as a taxable dividend to directors.
  4. The company must buy back all issued shares.

Explanation

Capital maintenance rules generally prohibit issuing shares below nominal value because that would undermine the stated capital. The usual consequence is that the issue is invalid or the subscriber is liable to pay the discount. Modern regimes with no-par value shares handle this differently.

Question 11Corporate Law

What is the key legal difference between a share buy-back and a dividend distribution?

  1. A buy-back returns capital by acquiring shares, while a dividend distributes profits. Correct answer.
  2. A buy-back requires no company funds.
  3. A buy-back can only be paid to directors.
  4. A dividend always reduces issued share capital.

Explanation

A buy-back involves the company acquiring its own shares, which affects capital and is subject to specific statutory procedures and solvency tests. A dividend is a distribution of profits to shareholders according to their holdings. The two are governed by different capital maintenance rules.

Question 12Corporate Law

What does the rule in Foss v Harbottle traditionally reflect?

  1. Directors are immune from suit by the company.
  2. The proper plaintiff for a wrong done to a company is the company itself. Correct answer.
  3. Minority shareholders can always veto board decisions.
  4. Shareholders may sue for any wrong at any time.

Explanation

The rule provides that where a wrong is done to a company, the proper plaintiff is the company, acting through its board. It reflects majority rule and prevents individual shareholders from litigating corporate claims. Statutory and derivative exceptions allow minority shareholders to bring proceedings in defined circumstances.

Question 13Corporate Law

A minority shareholder wishes to bring a derivative claim on behalf of the company against a director for breach of duty. What must she generally establish first?

  1. That the director has already been criminally convicted.
  2. That she owns at least 51 percent of the shares.
  3. That the board has unanimously approved the claim.
  4. That the company itself has not pursued the claim and that she acts in its interests. Correct answer.

Explanation

A derivative claim is brought by a shareholder on the company's behalf, so the claimant must show a prima facie case that the company is entitled to relief and that the claim is properly brought in its interests. She must also show that the company has not itself pursued the claim. Majority ownership and prior criminal conviction are not prerequisites.

Question 14Corporate Law

Which of the following is a typical statutory remedy available to an oppressed minority shareholder?

  1. An application to the court for relief on the ground that affairs are conducted oppressively. Correct answer.
  2. Automatic transfer of the majority's shares to the minority.
  3. Immediate liquidation without any court order.
  4. A criminal prosecution of the majority shareholder.

Explanation

Oppression remedies allow a court to grant relief where company affairs are conducted in a manner unfairly prejudicial to some members. Remedies can include a share purchase order, regulation of future conduct, or other appropriate relief. Automatic share transfer and criminal prosecution are not standard outcomes.

Question 15Corporate Law

What is the primary function of an independent non-executive director on a board?

  1. To guarantee the company's profitability.
  2. To represent only the largest shareholder's interests.
  3. To provide objective oversight of management and reduce conflicts. Correct answer.
  4. To manage daily operations alongside executives.

Explanation

Independent non-executive directors are intended to bring objective judgment to board deliberations, chair key committees, and monitor management. Their independence helps mitigate conflicts and improve accountability. They do not run daily operations or guarantee financial results.

Question 16Corporate Law

What is the effect of a company's constitution as a statutory contract?

  1. It overrides mandatory statutory provisions.
  2. It expires automatically after five years.
  3. It creates contractual rights enforceable by third parties against the company.
  4. It binds the company and its members to each other in respect of their membership rights. Correct answer.

Explanation

The constitution operates as a contract between the company and its members and among the members in their capacity as members. Outsiders generally cannot enforce it as a contract. It is also subordinate to mandatory statutory rules and has no automatic expiry.

Question 17Corporate Law

How may a company generally alter its constitution?

  1. By an ordinary resolution of the board alone.
  2. By special resolution of the members, subject to statutory protections. Correct answer.
  3. By an oral agreement among two shareholders.
  4. By a decision of the company secretary.

Explanation

Amending the constitution typically requires a special resolution, meaning a heightened majority of members, and must comply with statutory safeguards for minority rights. Board or officer decisions alone are insufficient. Informal oral agreements do not satisfy the formal amendment procedure.

Question 18Corporate Law

What is the usual rule about a company's capacity to act beyond the objects stated in its constitution?

  1. All ultra vires acts are automatically void against everyone.
  2. Third parties must inspect the constitution before every transaction.
  3. Acts beyond the objects may be valid as against third parties, though directors may face internal liability. Correct answer.
  4. Directors commit a criminal offence whenever they exceed the objects.

Explanation

Modern company law generally abolished the ultra vires doctrine as regards outsiders, so transactions remain valid even if they exceed the stated objects. Directors who act outside their authority may be liable internally. Third parties are generally entitled to assume the company has capacity.

Question 19Corporate Law

What does the doctrine of constructive notice traditionally mean for persons dealing with a company?

  1. They receive actual notice of all board resolutions.
  2. They are deemed to know the company's public registered documents. Correct answer.
  3. They are excused from reading any company records.
  4. They are deemed to know every private contract the company signs.

Explanation

Constructive notice imputes knowledge of a company's public documents, such as its constitution and register, to anyone dealing with it. Statutory reforms often limit this doctrine to protect good-faith third parties. It does not extend to private contracts or internal board resolutions.

Question 20Corporate Law

What is the main legal significance of a company's registered office?

  1. It determines the company's tax rate automatically.
  2. It must be owned by the company outright.
  3. It is the address for service of legal documents and official communications. Correct answer.
  4. It must be the location of all manufacturing operations.

Explanation

The registered office is the official address where legal process and official communications can be validly served on the company. It need not be a place of business or owned by the company. Tax rates are determined by tax law, not merely by the registered address.

Question 21Corporate Law

What is the effect of a pre-emption right in a company's constitution?

  1. Shares automatically convert into debt on a fixed date.
  2. Existing shareholders are offered new shares before they are issued to outsiders. Correct answer.
  3. Directors may issue shares to themselves without approval.
  4. Creditors receive priority over shareholders in dividends.

Explanation

Pre-emption rights give existing shareholders the first opportunity to subscribe for newly issued shares in proportion to their holdings, protecting against dilution. They are usually set out in the constitution or statute and may be disapplied by special resolution. They do not authorize self-dealing by directors.

Question 22Corporate Law

A shareholder who holds a controlling stake proposes a transaction that benefits herself at the company's expense. What protection is most relevant for minority shareholders?

  1. Fiduciary and fair-dealing rules that require the controller to act in the company's interests. Correct answer.
  2. The requirement that all transactions be approved by the company secretary.
  3. The rule that minority shareholders can unilaterally amend the constitution.
  4. The principle that controlling shareholders have no duties at all.

Explanation

Controlling shareholders and directors owe duties not to use their position to extract benefits at the company's expense, and transactions may be subject to fairness review or approval by disinterested parties. Minority shareholders may also rely on oppression remedies. They cannot unilaterally amend the constitution, and controllers are not duty-free.

Question 23Corporate Law

What happens to a company's legal personality when it is wound up and dissolved?

  1. It continues indefinitely for all purposes.
  2. It becomes a partnership by operation of law.
  3. It transfers automatically to the largest shareholder.
  4. Its legal personality ceases upon dissolution. Correct answer.

Explanation

A company retains legal personality during winding up but ceases to exist upon dissolution. Its remaining assets are distributed according to the statutory priority rules. Personality is not transferred to a shareholder or converted into a partnership.

Question 24Corporate Law

Which of the following best describes the duty to promote the success of the company?

  1. Directors must follow the personal preferences of the chair.
  2. Directors must maximize immediate share price regardless of consequences.
  3. Directors must prioritize the interests of the largest creditor at all times.
  4. Directors must act in good faith to promote the company's long-term success for members as a whole. Correct answer.

Explanation

This duty requires directors to act in good faith in the way most likely to promote the long-term success of the company for the benefit of members as a whole, having regard to specified stakeholder and long-term factors. It is not a mandate for short-term share price maximization. Creditor interests become relevant primarily in insolvency.

Question 25Corporate Law

A board rejects a takeover offer that would give shareholders a large premium, citing a desire to preserve the company's independence. Which legal issue is most directly raised?

  1. Whether the company must immediately dissolve.
  2. Whether the directors have committed tax fraud.
  3. Whether the company secretary must resign.
  4. Whether the directors are improperly frustrating a takeover rather than letting shareholders decide. Correct answer.

Explanation

Takeover regulation typically restricts directors from taking frustrating action that defeats a bid without shareholder approval, because the decision to accept a premium offer belongs to shareholders. Directors may still provide information and seek alternatives within the rules. Dissolution, tax fraud, and officer resignation are unrelated issues.

Question 26Corporate Law

Which of the following best describes the legal nature of a company's separate legal personality?

  1. The company is an entity distinct from its shareholders and directors, capable of owning property and contracting in its own name. Correct answer.
  2. The company is an agent of its shareholders, so its liabilities are attributed to them.
  3. The company is a partnership in which members are jointly liable for debts.
  4. The company is a trust in which directors hold assets for creditors.

Explanation

Separate legal personality means the company exists as a distinct legal person once incorporated. It can own assets, enter contracts, sue and be sued in its own name, and its obligations generally do not attach to members. This separation underpins limited liability and perpetual succession.

Question 27Corporate Law

What is the standard consequence of a company breaching a provision of its constitution in dealings with an outsider?

  1. The transaction is automatically void in every case.
  2. The company may be restrained internally, but the outsider's rights may still be enforceable depending on the rule protecting third parties. Correct answer.
  3. The directors become personally liable to the outsider for the full contract price.
  4. The constitution is treated as a criminal statute, and the outsider commits an offence.

Explanation

Breach of the constitution is generally an internal matter that members may enforce against the company. Outsiders dealing in good faith are commonly protected by statutory rules, so the transaction is not automatically void. The precise outcome depends on whether the outsider knew of the irregularity.

Question 28Corporate Law

Which of the following is the most accurate statement about the liability of a member of a company limited by shares?

  1. The member is liable only for any amount unpaid on the shares held. Correct answer.
  2. The member is liable for the directors' breaches of duty.
  3. The member is liable for all corporate debts as they fall due.
  4. The member is liable for the company's tax obligations in proportion to shareholding.

Explanation

In a company limited by shares, member liability is limited to any amount remaining unpaid on the nominal value of the shares. Once shares are fully paid, the member generally has no further obligation to contribute to corporate debts. This is the core meaning of limited liability.

Question 29Corporate Law

A promoter signs a contract on behalf of a company that has not yet been incorporated. The company is later incorporated and wishes to adopt the contract. What is the usual legal position?

  1. The company may ratify or adopt the contract after incorporation, but the promoter may remain liable unless released. Correct answer.
  2. The promoter's liability ends automatically upon incorporation.
  3. The contract is void ab initio and cannot be adopted.
  4. The company is automatically bound from the date of incorporation without any further step.

Explanation

A company cannot contract before it exists, so pre-incorporation contracts bind the promoter personally. After incorporation the company may adopt the benefit and burden by novation or ratification. The promoter remains liable unless the other party agrees to release them.

Question 30Corporate Law

Which statement best captures the duty of a director to avoid conflicts of interest?

  1. A director may use confidential corporate information for personal gain after leaving office.
  2. A director may compete with the company if the constitution is silent.
  3. A director must avoid situations where personal interests conflict or may conflict with the company's interests, unless properly authorised. Correct answer.
  4. A director may keep any personal profit provided the company ultimately benefits.

Explanation

Directors owe a fiduciary duty to avoid conflicts, including potential conflicts, unless the conflict is authorised by the board or members under the constitution. The duty is prophylactic and does not require proof of loss. Confidential information remains protected after departure.

Question 31Corporate Law

A director is offered a bribe by a supplier to secure a contract. Which duty is most directly engaged?

  1. The duty to act within powers.
  2. The duty to exercise independent judgment and the duty not to accept benefits from third parties. Correct answer.
  3. The duty to promote the success of the company only.
  4. The duty to declare a interest in an existing transaction only.

Explanation

Accepting a bribe compromises independent judgment and breaches the specific duty not to accept benefits conferred by third parties because of the director's position. The director must account for the bribe to the company. The duty to declare interests is related but distinct.

Question 32Corporate Law

What is the general rule about a company purchasing its own shares out of capital?

  1. It is generally restricted and permitted only through prescribed procedures such as a court-approved reduction or a lawful buy-back. Correct answer.
  2. It is freely permitted with no procedural requirements.
  3. It is always prohibited under all circumstances.
  4. It requires only the CEO's written approval.

Explanation

Capital maintenance principles restrict the return of capital to shareholders. A company may purchase its own shares only through lawful routes such as a permitted buy-back or a reduction of capital approved by the prescribed procedure. This protects creditors.

Question 33Corporate Law

A company wishes to reduce its share capital. Which of the following is the most typical requirement in modern company law?

  1. A simple majority vote of the board alone.
  2. A unanimous resolution of all creditors.
  3. Approval by the stock exchange only.
  4. A special resolution of members plus a solvency statement or court approval, depending on the statutory route. Correct answer.

Explanation

Reductions of capital generally require member approval by special resolution and either a solvency statement or court confirmation, depending on the jurisdiction's statutory scheme. These safeguards protect creditors. Board approval alone is insufficient.

Question 34Corporate Law

Which of the following statements about the appointment of directors is generally correct?

  1. Directors may only be appointed by the court.
  2. Directors are appointed by the company's largest creditor.
  3. Directors are typically appointed by the members or by the board under powers in the constitution, subject to any statutory formalities. Correct answer.
  4. Directors are appointed automatically by the company's auditors.

Explanation

Appointment of directors is governed by the constitution and applicable company legislation. Members usually appoint directors by ordinary resolution, and boards may fill casual vacancies where authorised. Statutory formalities such as consent to act may apply.

Question 35Corporate Law

A director resigns but continues to attend board meetings and influence decisions. How is her position best characterised?

  1. She is a de facto director because she continues to act as a director without valid appointment. Correct answer.
  2. She has no duties because her resignation was valid.
  3. She is a shadow director because she directs the board from outside.
  4. She is automatically a member of the audit committee.

Explanation

A de facto director is someone who acts as a director without valid appointment or authority. Continuing to perform director functions after resignation can create de facto status and attract fiduciary duties. A shadow director, by contrast, directs others without holding herself out as a director.

Question 36Corporate Law

What is the principal purpose of an annual general meeting of a public company?

  1. To transfer shares automatically between members.
  2. To elect the company's creditors.
  3. To allow the board to approve the financial statements without member involvement.
  4. To give members an opportunity to review the company's affairs, appoint auditors, and vote on ordinary business. Correct answer.

Explanation

The annual general meeting provides a regular forum for members to receive accounts, consider the directors' report, appoint auditors, and vote on resolutions. It supports accountability of the board to the membership. It does not transfer shares or elect creditors.

Question 37Corporate Law

Which of the following best describes the rule that a company cannot generally exercise a power for an improper purpose?

  1. Powers conferred for one purpose, such as issuing shares to raise capital, cannot be used for a collateral purpose such as defeating a takeover. Correct answer.
  2. Directors may use any power if a majority of the board supports it.
  3. Members may ratify any breach by a simple majority in all cases.
  4. Improper purpose is irrelevant if the company makes a profit.

Explanation

Corporate powers must be exercised for the purposes for which they were conferred. Using a share issuance power primarily to entrench directors or defeat a bid is a classic improper purpose. Profit does not cure an improper exercise of power.

Question 38Corporate Law

What is the usual legal effect of a company's articles of association on its members?

  1. They are mere internal guidelines with no legal force.
  2. They bind only the directors and not the members.
  3. They override the company legislation in cases of conflict.
  4. They create contractual rights and obligations between the company and its members and among members in their capacity as members. Correct answer.

Explanation

The articles operate as a statutory contract binding the company and its members in their capacity as members. They do not generally create enforceable rights for outsiders. Legislation prevails over inconsistent articles.

Question 39Corporate Law

A company's articles provide that disputes between shareholders must be referred to arbitration. A member sues the company for a breach of the articles. What is the likely analysis?

  1. The clause may be enforceable as part of the statutory contract, but its scope and any statutory remedies must be considered. Correct answer.
  2. The clause converts the company into a partnership.
  3. The arbitration clause is automatically void because articles are not contracts.
  4. The member must always sue in the criminal courts.

Explanation

Articles are a statutory contract, so arbitration clauses within them can be enforceable between the company and members. However, courts examine whether the dispute falls within the clause and whether statutory remedies are excluded. The clause does not change the company's legal form.

Question 40Corporate Law

Which of the following is the most accurate description of the role of the company secretary in a large company?

  1. The secretary is personally liable for all corporate debts.
  2. The secretary is solely responsible for the company's trading strategy.
  3. The secretary must be a director of the company.
  4. The secretary supports corporate governance, maintains statutory records, and ensures compliance with filing obligations. Correct answer.

Explanation

The company secretary is an administrative and compliance officer responsible for statutory registers, minutes, and filings. The role supports good governance rather than commercial strategy. The secretary need not be a director and does not assume personal liability for corporate debts.

Question 41Corporate Law

What is the primary legal significance of a company's common seal in modern practice?

  1. It proves the company has unlimited liability.
  2. It is a formal device for executing documents, though many jurisdictions now allow execution by authorised signatories without a seal. Correct answer.
  3. It is the only way a company can enter contracts.
  4. It replaces the need for board resolutions entirely.

Explanation

Historically the common seal was the formal method of executing documents on behalf of a company. Modern law commonly permits execution by directors or authorised signatories without a seal. A seal does not affect liability or dispense with governance requirements.

Question 42Corporate Law

A director of a subsidiary also sits on the board of the parent company. The subsidiary is asked to enter a transaction that benefits the parent at the subsidiary's expense. What is the director's primary obligation?

  1. To disclose the conflict only to the parent's shareholders.
  2. To act in the best interests of the subsidiary, considering the group context where appropriate, and to manage the conflict transparently. Correct answer.
  3. To resign immediately in all cases.
  4. To favour the parent because group interests always prevail.

Explanation

Each company in a group is a separate legal person, and directors owe their duties to their own company. Group context may be considered, but the subsidiary's interests remain paramount. Conflicts must be declared and managed under the constitution and statute.

Question 43Corporate Law

Which of the following best explains the concept of a shadow director?

  1. A director appointed by the court during insolvency.
  2. A director who has resigned but keeps an office.
  3. A member who holds more than half the shares.
  4. A person whose directions or instructions the directors are accustomed to follow. Correct answer.

Explanation

A shadow director is someone who is not formally appointed but whose directions the board is accustomed to follow. The person may attract director duties and liabilities. Professional advisers giving advice in that capacity are generally excluded.

Question 44Corporate Law

A board proposes to pay a large termination payment to a departing chief executive. Which governance concern is most relevant?

  1. Whether the payment is authorised and consistent with the directors' duties, including proper use of powers and disclosure. Correct answer.
  2. Whether the chief executive is a member of the company.
  3. Whether the company has a common seal.
  4. Whether the payment is made in cash rather than by cheque.

Explanation

Large termination payments raise questions of authorisation, proper purpose, and the directors' duty to promote the company's success. Member approval may be required under statute or the constitution. The method of payment and the executive's membership are not the central concerns.

Question 45Corporate Law

What is the usual effect of a members' voluntary winding up on the company's legal personality?

  1. The company ceases to exist immediately upon the resolution.
  2. The company becomes a partnership.
  3. The company's personality transfers to the liquidator.
  4. The company continues in existence during winding up and is dissolved only on completion of the process. Correct answer.

Explanation

During winding up the company retains legal personality while the liquidator realises assets and pays creditors. The company is dissolved at the end of the process. Personality is not transferred to the liquidator.

Question 46Corporate Law

Which of the following best describes the test often applied when considering whether a director has breached the duty of care and skill?

  1. Whether the director acted with the care, skill, and diligence reasonably expected of a person carrying out those functions. Correct answer.
  2. Whether the director was personally popular with shareholders.
  3. Whether the director achieved the highest possible profit for the company.
  4. Whether the director attended every board meeting.

Explanation

The duty of care and skill is generally measured objectively against the standards reasonably expected of a person in that role, sometimes with a subjective overlay of the director's actual knowledge. It is not a strict liability standard for outcomes. Attendance and popularity are not the test.

Question 47Corporate Law

A shareholder discovers that directors have misappropriated corporate assets. The company's board refuses to sue. Which route is most appropriate for the shareholder to pursue?

  1. A personal claim for the full value of the assets as damages.
  2. A criminal prosecution commenced in the shareholder's own name.
  3. A derivative claim brought on behalf of the company, subject to the statutory permission requirements. Correct answer.
  4. An application to wind up the company automatically.

Explanation

Where directors wrong the company and the board declines to act, a member may seek permission to bring a derivative claim in the company's name. The claim belongs to the company, and any recovery goes to it. Personal claims are limited to losses suffered by the shareholder directly.

Question 48Corporate Law

Which of the following statements about a company's ability to grant financial assistance for the purchase of its own shares is generally correct in jurisdictions retaining such rules?

  1. Financial assistance is always lawful if the board approves it.
  2. Financial assistance is restricted to protect shareholders and creditors, subject to statutory exceptions and procedures. Correct answer.
  3. Financial assistance applies only to private companies and never to public companies.
  4. Financial assistance is mandatory for all takeovers.

Explanation

Financial assistance rules restrict a company from giving financial help for the acquisition of its shares, reflecting capital maintenance and creditor protection concerns. Statutory exceptions and procedures may permit transactions. The rules are not a blanket authorisation or a mandatory requirement.

Question 49Corporate Law

What is the principal function of due diligence in a share acquisition?

  1. To replace the need for a share purchase agreement.
  2. To transfer shares automatically to the buyer.
  3. To investigate the target's legal, financial, and operational position so the buyer can price and allocate risk. Correct answer.
  4. To guarantee that the target has no liabilities.

Explanation

Due diligence is an investigative process that informs valuation, warranty negotiation, and risk allocation. It cannot guarantee the absence of liabilities. It does not itself transfer shares or replace the acquisition agreement.

Question 50Corporate Law

A company's board resolves to enter a transaction that requires member approval under the constitution, but the approval is never obtained. The counterparty dealt in good faith. What is the most likely outcome?

  1. The transaction is necessarily void and the counterparty has no remedy.
  2. The company may be bound as against the good-faith counterparty, while the directors face internal consequences for the breach. Correct answer.
  3. The transaction is valid only if the counterparty is also a director.
  4. The counterparty becomes a shareholder automatically.

Explanation

Statutory protections for persons dealing with a company in good faith commonly preserve the transaction's validity despite internal irregularities. The company may still hold directors accountable for exceeding authority. The counterparty's shareholding status is irrelevant.