X

After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as
drawee. The bill reads: "October 1, 2016. Pay to the order of B the sum of Pl million. To: C
(drawee). Signed, A." A then delivered the bill to B who, however, lost it. It turned out
that it was stolen by D, B's brother. D lost no time in forging B's signature and negotiated
it to E who acquired it for value and in good faith.

May E recover on the bill from C, the drawee? Explain. (5%)

E may recover on the bill from C, the drawee, provided that C accepts the instrument
presented by E.

Section 62 of the Negotiable Instruments Law provides that the acceptor, by accepting
the instrument, engages that he will pay it according to the to the tenor of his
acceptance and admits: a) the existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the instrument; and b) the existence
of the payee and his then capacity to indorse.

Here, the acceptance of C makes him primarily liable to the holder of the instrument.
Even if the drawer’s signature is forged, his acceptance warrants that the drawer’s
signature is genuine.

XI
Royal Links Golf Club obtained a loan from a bank which is secured by a mortgage on
a titled lot where holes 1, 2, 3 and 4 are located. The bank informed the Board of
Directors (Board) that if the arrearages are not paid within thirty (30) days, it will extra-
judicially foreclose the mortgage. The Board decided to offer to the members 200
proprietary membership shares, which are treasury shares, at the price of Pl 75,000.00
per share even when the current market value is P200,000.00.

In behalf and for the benefit of the corporation, Peter, a stockholder, filed a derivative
suit against the members of the Board for breach of trust for selling the shares at
P25,000.00, lower than its market value, and asked for the nullification of the sales and
the removal of the board members. Peter claims the Club incurred a loss of PS million.
The Board presented the defense that in its honest belief any delay in the payment of
the arrearages will be prejudicial to the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the best solution to the problem. Decide the
suit and explain. (5%)

The suit of Peter should not be given due course for failure to show that the act was
made in bad faith and for his failure to exhaust all intra-corporate remedies.

The Business Judgment Rule states that unless otherwise provided in the Code, all
corporate powers and prerogatives are vested directly in the Board of Directors.
Directors cannot be held liable for mistakes or errors in the exercise of their business
judgment if they acted in good faith, with due care & prudence. Contracts intra vires
entered into by the board of directors are binding upon the corporation & courts will not
interfere. Furthermore, in order for a derivative suit to prosper, it must be shown with
particularity that the Stockholder had exhausted the intra corporate remedies
available.

In this case, the sale of the shares by the Board of Directors is not shown to have
been made in bad faith nor was it in breach of trust of the stockholders. The said act is
within the sound business judgment of the Board. Moreover, it was not shown that Peter
had exhausted all intra-corporate remedies which is a condition precedent in a
derivative suit.

XII

X owns 10,000 shares in Z Telecoms Corp. As he is in immediate need of money, he

offered to sell all his shares to his friend, Y, at a bargain price. Upon receipt of the
purchase price from Y, X proceeded to indorse in blank the certificates of shares and
delivered these to Y. The latter then went to the corporate secretary of Z Telecoms
Corp. and requested the transfer of the shares in his name.

The corporate secretary refused since X merely indorsed the certificates in blank to Y.
According to the corporate secretary, the certificates should have been specifically
indorsed to the purchaser, Y. Was the corporate secretary justified in declining Y's
request? Discuss. ( 5%)

The corporate secretary is not justified in declining the request of Y to transfer the shares
in his name.

Sec. 63 of the Corporation Code provides that the shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates endorsed
by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. Moreover, Sec. 34 of the negotiable instruments law provides that an
indorsement in blank specifies no indorsee, and an indorsement so indorsed is payable
to bearer, and may be negotiated by delivery.

In the present case, X indorsed in blank the certificate of stock and delivered the same
to Y. Hence, there was a valid transfer of stocks to Y, and the corporate secretary is not
justified in declining Y’s request.

XIII

C Corp. is the direct holder of 10% of the shareholdings in U Corp., a nonlisted (not
public) firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed
company. The other principal stockholder in H Corp. is C Corp. which owns 18% of its
shares. Meanwhile, the majority stocks in U Corp. are owned by B Corp. and V Corp. at
22% and 30%, respectively. B Corp. and V Corp. later sold their respective shares in U
Corp. to C Corp., thereby resulting in the increase of C Corp.'s interest in U Corp.,
whether direct or indirect, to more than 50%.

[a] Explain the Tender Offer Rule under the Securities Regulation Code. (2.5%)

[b) Does the Tender Offer Rule apply in this case where there has been an indirect
acquisition of the shareholdings in H Corp. by C Corp.? Discuss. (2.5%)

a) Tender offer is a publicly announced intention by a person acting alone or in concert

with other persons to acquire equity securities of a corporation which is listed on an
exchange, public corporation or a corporation with assets exceeding P50,000,000.00
and with 200 or more stockholders, at least 200 of them holding not less than 100 shares
of such company.

It is in place to protect minority shareholders against any scheme that dilutes the share
value of their investments. It also gives the minority shareholders the chance to exit the
company under reasonable terms, giving them the opportunity to sell their shares at the
same price as those of the majority shareholders.

b) The Tender Offer Rule will apply in this case where there has been an indirect
acquisition of the shareholdings in H Corp. by C Corp.

Settled is the rule that the mandatory tender offer rule covers not only direct acquisition
but also indirect acquisition or any type of acquisition. For the purpose of protecting the
minority stockholders of a listed corporation, mandatory tender offer applies whatever
may be the method by which control of a public company is obtained, either through
the direct purchase of its stocks or through an indirect means such as in this case.

XIV

X, a government official, has a number of bank accounts in T Bank containing millions

of pesos. He also opened several trust accounts in the same bank which specifically
covered the placement and/or investment of funds. X was later charged with graft and
corruption before the Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor
filed a motion praying for a court order authorizing it to look into the savings and trust
accounts of X in T Bank. X opposed the motion arguing that the trust accounts are not
"deposits" under the Law on Secrecy of Bank Deposits (Rep. Act No. 1405). Is the
contention of X correct? Explain. (5%)

The contention of X that the trust accounts are not deposits under the Law on Secrecy of
Bank Deposits is not correct.
An examination of the above cited law shows that the term "deposits" used therein is to
be understood broadly and not limited only to accounts which give rise to a creditor-
debtor relationship between the depositor and the bank. Section 2 of RA 1405 in fact
even more clearly shows that the term "deposits" was intended to be understood
broadly:

SECTION 2. All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the Philippines,
its political subdivisions and its instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined, inquired or looked into by
any person, government official, bureau or office, except upon written permission of the
depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited
or invested is the subject matter of the litigation. The phrase "of whatever nature"
proscribes any restrictive interpretation of "deposits." Moreover, it is clear from the
immediately quoted provision that, generally, the law applies not only to money which
is deposited but also to those which are invested.

Clearly in the case at bar, R.A. 1405 is broad enough to cover Trust Accounts.

XV

ABC Corp. is engaged in the pawnshop business involving cellphones, laptops and
other gadgets of value. In order to expand its business and attract investors, it offered
to any person who invests at least Pl00,000.00 a "Promissory Note" where it obligated
itself to pay the holder a 50% return on investment within one month. Due to the
attractive offer, many individuals invested in the company but not one of them was
able to realize any profit after one month. Has ABC Corp. violated any law with its
scheme? Explain. (5%)

ABC Corp. has violated the Securities Regulation Code or R.A. No. 8799. Its business
constitutes investment contracts which should be registered with Securities and
Exchange Commission before its sale or offer for sale or distribution to the public.

The Court held in the case of Power Homes Unlimited Corp. v. SEC that any investment
contract covered by the Howey Test must be registered under the Securities Act,
regardless of whether its issuer was engaged in fraudulent practices. R.A. No. 8799
defines an investment contract as a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to expect profits not solely but
primarily from the efforts of others.