Directors' and Officers' Duties and Liabilities: A Comprehensive Guide for Juris Doctor Students

Question 1

Which of the following is **not** a fiduciary duty owed by directors and officers to the corporation?

Accepted Answer

Duty to maximize profits

Answer

Duty of care

Answer

Duty of loyalty

Answer

Duty of good faith

Question 2

Which of the following is NOT considered a core fiduciary duty of directors to the corporation?

Accepted Answer

Duty of Obedience

Answer

Duty of Care

Answer

Duty of Candor

Answer

Duty of Loyalty

Question 3

The business judgment rule may provide a defense for directors in situations where:

Accepted Answer

They acted in good faith and in the best interests of the corporation

Answer

They failed to exercise reasonable care in making a decision

Answer

They engaged in self-dealing transactions

Answer

They relied exclusively on the advice of outside counsel

Question 4

Directors and officers (D&O) insurance typically provides coverage for:

Accepted Answer

Liabilities arising from breaches of fiduciary duties

Answer

Lost income due to wrongful termination

Answer

Personal injury claims against the director or officer

Answer

Property damage caused by the director or officer

Question 5

Which of the following is NOT a fiduciary duty owed by directors and officers to the corporation?

Accepted Answer

Duty of obedience

Answer

Duty of care

Answer

Duty of loyalty

Answer

Duty of confidentiality

Question 6

Negligence in the context of directors' and officers' liability refers to:

Accepted Answer

Failing to meet a reasonable standard of care

Answer

Intentionally violating a duty

Answer

Recklessly disregarding a known risk

Answer

Breaching a statutory requirement

Question 7

Self-dealing transactions involving directors and officers are generally prohibited primarily due to:

Accepted Answer

Conflict of interest

Answer

Duty of loyalty

Answer

Duty of care

Answer

Fiduciary duty to shareholders

Question 8

Directors and officers may rely on information provided by other corporate officials in making decisions under the:

Accepted Answer

Business judgment rule

Answer

Sarbanes-Oxley Act

Answer

Duty of care

Answer

Insider trading regulations

Question 9

What is the primary obligation of a director's duty of obedience?

Accepted Answer

Comply with corporate policies and procedures

Answer

Adhere to all shareholder directives

Answer

Abstain from conflicts of interest

Answer

Entrust all decision-making to the CEO

Question 10

Which of the following is NOT a core fiduciary duty owed by directors to the corporation?

Accepted Answer

Duty of obedience

Answer

Duty of care

Answer

Duty of loyalty

Answer

Duty of good faith

Question 11

When are shareholders typically permitted to bring a derivative action on behalf of the corporation?

Accepted Answer

When the board of directors is unwilling or unable to pursue the action

Answer

When the shareholder has suffered a direct personal financial loss

Answer

When the corporation is insolvent

Answer

When the shareholder has a majority of the voting shares

Question 12

What is the significance of the "Caremark" case in corporate governance?

Accepted Answer

It defined the duty of care for directors as a duty to monitor the corporation

Answer

It established the business judgment rule as a complete defense to director liability

Answer

It imposed liability on directors for failing to prevent corporate fraud

Answer

It expanded the scope of shareholder derivative actions

Question 13

Which fiduciary duties are primarily owed by directors and officers to the corporation?

Accepted Answer

Duty of Care and Duty of Loyalty

Answer

Duty of Obedience and Duty of Confidentiality

Answer

Duty of Prudence and Duty of Good Faith

Answer

Duty of Diligence and Duty of Transparency

Question 14

Which of the following is NOT a core fiduciary duty owed by directors to the corporation?

Accepted Answer

Maximize short-term profits at the expense of long-term sustainability

Answer

Exercise due care and diligence in decision-making

Answer

Avoid conflicts of interest

Answer

Act in good faith and in the best interests of the corporation

Question 15

Under the business judgment rule, directors are generally not liable for decisions made:

Accepted Answer

If they acted in good faith and exercised reasonable care

Answer

If they relied on inaccurate information

Answer

If they failed to follow proper procedures

Answer

If they had a conflict of interest

Question 16

Directors can be held personally liable for:

Accepted Answer

Breaches of fiduciary duties

Answer

Contractual obligations of the corporation

Answer

Torts committed by employees of the corporation

Question 17

The primary objective of the Sarbanes-Oxley Act of 2002 is to:

Accepted Answer

Improve corporate governance and enhance financial reporting

Answer

Increase shareholder protections

Answer

Reduce executive compensation

Question 18

The doctrine of "piercing the corporate veil" allows courts to:

Accepted Answer

Disregard the separate legal existence of a corporation and hold shareholders personally liable for corporate debts

Answer

Prevent directors from exercising authority over corporate affairs

Answer

Transfer assets from one corporation to another

Question 19

To whom do corporate officers owe fiduciary duties?

Accepted Answer

The corporation and its shareholders

Answer

Creditors

Answer

Employees

Answer

The board of directors

Question 20

The duty of care requires directors and officers to:

Accepted Answer

Exercise the same level of care and diligence that a reasonably prudent person would exercise in similar circumstances.

Answer

Avoid all risks, even if they are inherent in the nature of the business

Answer

Guarantee the success of the corporation, regardless of external factors or market conditions

Question 21

The duty of care owed by directors and officers is primarily a:

Accepted Answer

Legal duty imposed by law and enforceable through legal remedies

Answer

Contractual duty arising from an agreement between the directors/officers and the corporation

Answer

Ethical duty derived from professional standards and codes of conduct

Answer

Moral duty based on personal values and ethical principles

Question 22

Which of the following actions would NOT be considered a breach of a director's duty of loyalty?

Accepted Answer

Acting in the corporation's best interests

Answer

Using corporate opportunities for personal gain

Answer

Engaging in self-dealing

Answer

Competing with the corporation

Question 23

What is the primary role of the board of directors in corporate governance?

Accepted Answer

To establish corporate policies, oversee management, and safeguard shareholder interests

Answer

To hire and fire the CEO

Answer

To approve all major corporate transactions

Question 24

Which of the following could constitute a conflict of interest for a director?

Accepted Answer

Holding a substantial ownership interest in a competing company

Answer

Serving on the board of a non-profit organization

Answer

Maintaining a personal friendship with the CEO

Question 25

What is the distinction between gross negligence and ordinary negligence in the context of director liability?

Accepted Answer

Gross negligence involves a higher degree of recklessness or conscious disregard for duty

Answer

Gross negligence is only applicable to officers, not directors

Answer

Ordinary negligence requires a showing of intentional misconduct

Question 26

What is the scope of the duty of disclosure in the context of a merger or acquisition?

Accepted Answer

To provide shareholders with all material information regarding the transaction

Answer

To guarantee the transaction is beneficial to the corporation

Answer

To obtain shareholder consent for the transaction

Question 27

Which of the following is NOT a potential liability for a director or officer who breaches their fiduciary duty?

Accepted Answer

Bankruptcy

Answer

Gross Negligence

Answer

Intentional Misconduct

Answer

Negligence

Question 28

In performing their duties, directors and officers are expected to meet the standard of care of a:

Accepted Answer

Reasonably prudent person in similar circumstances

Answer

Reasonable layperson

Answer

Highest possible standard

Answer

No standard whatsoever

Question 29

Self-dealing is:

Accepted Answer

A transaction in which a director or officer has a personal interest that conflicts with the interests of the corporation.

Answer

Any transaction that benefits the director or officer.

Question 30

The duty of disclosure requires directors and officers to:

Accepted Answer

Disclose all material information that could affect the corporation's financial condition or operations.

Answer

Disclose information only if requested by shareholders.

Question 31

The board of directors' primary role in corporate governance is to:

Accepted Answer

Provide independent oversight of the corporation's operations and ensure that the corporation is being managed in the best interests of the shareholders.

Answer

Manage the corporation's daily operations.

Question 32

Compared to ordinary negligence, gross negligence involves:

Accepted Answer

A greater degree of carelessness or recklessness

Answer

A higher burden of proof

Answer

Only criminal penalties

Question 33

Indemnification provisions in corporate bylaws aim to:

Accepted Answer

Protect directors and officers from personal liability for actions taken in the course of their duties.

Answer

Allow directors and officers to profit from favorable legal outcomes

Question 34

Which of the following is NOT a fiduciary duty owed by directors and officers to the corporation and its shareholders?

Accepted Answer

To act in their own best interests

Answer

To act with care, loyalty, and good faith

Answer

To avoid self-dealing and conflicts of interest

Question 35

Identify the type of negligence that occurs when a director or officer makes a decision without reasonable care and prudence.

Accepted Answer

Simple negligence

Answer

Intentional misconduct

Answer

Reckless conduct

Answer

Gross negligence

Question 36

What is the primary purpose of the duty of loyalty owed by directors and officers to their corporation?

Accepted Answer

To prevent directors and officers from acting in their own self-interest to the detriment of the corporation.

Answer

To ensure that directors and officers make decisions based on sound business judgment.

Question 37

Which of the following actions would typically be considered self-dealing?

Accepted Answer

A director using their position to obtain a personal loan from the corporation.

Answer

A director investing in a competitor of the corporation.

Answer

A director voting against a resolution to increase their own salary.

Question 38

How does gross negligence differ from simple negligence in the context of a director's or officer's duty of care?

Accepted Answer

Gross negligence involves a significantly higher degree of recklessness and indifference to the potential consequences.

Answer

Gross negligence is a complete defense to breach of fiduciary duty claims, while simple negligence is not.

Answer

Simple negligence only applies to acts of omission, while gross negligence applies to acts of commission.

Question 39

What is the significance of the business judgment rule in protecting directors and officers from liability?

Accepted Answer

It creates a presumption that directors and officers acted in good faith and with reasonable care, placing the burden on the plaintiff to prove otherwise.

Answer

It immunizes directors and officers from liability for all business decisions.

Answer

It only applies to decisions made by committees of the board.

Question 40

Which of the following factors is typically NOT considered when evaluating whether a director has breached their duty of care?

Accepted Answer

The size of the corporation.

Answer

The information available to the director at the time of the decision.

Answer

The director's experience and expertise.

Answer

The potential consequences of the decision.

Question 41

What is the primary objective of the duty of disclosure owed by directors and officers to shareholders?

Accepted Answer

To ensure that shareholders have access to all material information necessary to make informed decisions regarding the corporation.

Answer

To protect directors and officers from liability.

Answer

To prevent insider trading.

Question 42

Which of the following is NOT a fiduciary duty owed by directors to the corporation?

Accepted Answer

To act in their own best interests

Answer

To exercise due care

Answer

To act in good faith

Answer

To act in the best interests of the corporation and its shareholders

Question 43

What is the standard of care that directors are required to exercise in the performance of their duties?

Accepted Answer

Due care

Answer

Gross negligence

Answer

Strict liability

Answer

Ordinary negligence

Question 44

What is the business judgment rule?

Accepted Answer

A presumption that directors' decisions are made in good faith and in the best interests of the corporation, unless proven otherwise

Answer

A requirement that directors must always act in the best interests of the majority shareholders

Question 45

What is the duty of loyalty?

Accepted Answer

The duty to act in the best interests of the corporation and its shareholders

Answer

The duty to disclose all conflicts of interest

Answer

The duty to exercise due care in the performance of one's duties

Question 46

What is the duty of care?

Accepted Answer

The duty to exercise the same degree of care and diligence as a reasonably prudent person would exercise in the same circumstances

Answer

The duty to act in the best interests of the corporation and its shareholders

Question 47

What is the duty of disclosure?

Accepted Answer

The duty to disclose all material information to the corporation and its shareholders

Answer

The duty to exercise due care in the performance of one's duties

Answer

The duty to act in the best interests of the corporation and its shareholders

Question 48

What is the duty of obedience?

Accepted Answer

The duty to follow the lawful instructions of the corporation and its shareholders

Answer

The duty to disclose all conflicts of interest

Answer

The duty to keep the corporation's financial records confidential

Question 49

What is the duty of confidentiality?

Accepted Answer

The duty to keep the corporation's financial records confidential

Answer

The duty to disclose all material information to the corporation and its shareholders

Answer

The duty to follow the lawful instructions of the corporation and its shareholders

Question 50

Which of the following is NOT a fiduciary duty owed by directors to a corporation in the United States?

Accepted Answer

Maximize shareholder profits

Answer

Exercise due care

Answer

Promote the best interests of the corporation

Answer

Act in good faith

Question 51

In which scenario would a director likely be held liable for a breach of the duty of care?

Accepted Answer

Approving a significant investment without conducting proper due diligence.

Answer

Relying on the advice of reputable experts in a specialized field.

Answer

Failing to attend all board meetings, but staying informed on corporate matters.

Answer

Making a business decision that, in hindsight, turns out to be unprofitable.

Question 52

Which of the following is a potential remedy for a director breaching the duty of loyalty?

Accepted Answer

Rescission of a self-dealing transaction.

Answer

Increased liability insurance premiums.

Answer

Loss of voting rights.

Answer

Criminal prosecution (in cases of egregious misconduct).

Question 53

What is the primary purpose of the business judgment rule in corporate law?

Accepted Answer

To shield directors from liability for decisions made in good faith, with due care, and in the corporation's best interests.

Answer

To provide a legal framework for shareholder lawsuits against directors.

Answer

To eliminate the duty of care for directors.

Answer

To require directors to prioritize shareholder profits above all else.

Question 54

What is the primary objective of the duty of disclosure for directors and officers?

Accepted Answer

To ensure shareholders are adequately informed about significant corporate matters.

Answer

To protect directors from liability for misleading statements.

Answer

To enhance transparency within the corporation.

Answer

To guarantee that all corporate decisions are made by a majority vote.

Question 55

What is the primary purpose of indemnification provisions in corporate bylaws?

Accepted Answer

To reimburse directors and officers for expenses incurred in defending against lawsuits related to their corporate service.

Answer

To guarantee that directors and officers will not be held personally liable for any wrongdoing.

Answer

To prevent shareholders from suing directors and officers.

Answer

To encourage directors and officers to take more risks.