CORPORATION LAW FINAL EXAMINATION REVIEWER
Any meeting of a SH/members irregularly held
TRUE OR FALSE
1. The by-laws of a stock corporation may provide
that stockholders meeting may be held
anywhere in the Philippines?
- False. Sec. 51 states that SH or members’
meetings, whether regular or special shall be
held in the city or municipality where the
principal office of the corporation is located.
2. Absent of any by-law provision authorizing the
holding of a meeting of members in a non-
stock corporation, members’ meetings may
nonetheless be validly held anywhere in the
Philippines?
- False. In the absence of a by-law provision to the
contrary (Sec. 93), hold membership meeting
beyond the boundaries of the city or municipality
where its principal office is located under the
general rule relative to the place of meetings
provided for under Sec. 51
3. The dissolved constituent corporation in a
merger should necessarily liquidate its
corporate affairs?
- False. Associated Bank v. CA, although there is a
liquidation of the absorbed corporations, there is
no winding up of their affairs or liquidation of
their assets because the surviving corporation
automatically acquires all their rights, privileges
and powers as well as liabilities.
4. Non-filing of by-laws within the period of time
provided for by-law results to the automatic
dissolution of the corporation?
- False. Loyola Grand Villas v. CA, it will result in
suspension or revocation of the corporate
franchise after proper notice and hearing.
5. The appointment of
distributor/representative in the Philippines
made by a foreign corporation necessarily
results to doing/transacting business in the
country?
- False. In Communication Materials & Design,
Inc., vs. CA, the SC ruled that if the distributor or
representative appointed by the foreign
corporation has maintained an independent
status during the existence of their contract, the
mere appointment of such distributor or
representative will not constitute doing business
in the Philippines. Such independent status may
be determined by the provisions of the
contractual agreement entered into by the
foreign corporation and its representative.
6.
or called is necessarily without force and
effect?
- False. Sec. 51: the meetings shall be valid even
of irregularly held or called provided:
 All proceedings had and any business
transacted is within the powers or
authority of the corporation,
 All SH/members of the corporation are
present or duly represented at the
meeting
7. No stockholder may be able to compel the
corporation to pay the value of his shares if the
corporation has no unrestricted retained
earnings
- False, a stockholder of a close corporation may
for any reason, provided only that the
corporation has sufficient assets to cover its
debts and liabilities.
8. In amendment of the by-laws, appraisal right is
available?
- False, it is available only if the amendment has
the effect of changing or restricting the rights of
any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence (Sec. 81[1])
9. No stockholder in a stock corporation can ever
demand if the principal office is amended,
changing it from QC to Manila.
- False, a stockholder in a close corporation may
for any reason compel the close corporation that
he be paid the fair value of his shares (Sec. 105)
10. All religious corporations commence to exist
and are vested with juridical personality upon
a filing of AOI with SEC?
- False. Corporation Sole commences to exist and
are vested with juridical personality upon filing of
the AOI with the SEC. Religious societies
however acquire juridical personality upon
issuance of the Certificate of Registration with
the SEC.
11. Cumulative voting is generally not allowed in a
Non-stock corporation?
- True, members are only entitled to only one vote,
unless allowed by the articles of incorporation or
by-laws (Sec. 89)
12. In a corporate controversy, service of summons
upon a corporation is valid if made upon any of
its directors/trustee?
- False. Under the Rules of Court, service of
summons may be made only upon the President,
Managing Partner, General Partner, Corporate
Secretary, Treasurer, or in-house counsel.
 Service of summons upon persons other than
those named is without force and effect.
13. There is no distinction between a purchase sale
and subscription of the unissued stocks of a
corporation
- True. Sec. 60, any contract for the acquisition of
unissued stock in an existing corporation or a
corporation still be formed shall be deemed a
subscription within the meaning of this title,
notwithstanding the fact that the parties refer to
it as a purchase or some other contract.
14. All corporations dissolved necessarily
undertake liquidation and winding up of their
corporate affairs.
- False. In mergers, although there is a liquidation
of the absorbed corporations, there is no winding
up of their affairs or liquidation of their assets
because the surviving corporation automatically
acquires all their rights, privileges and powers as
well as liabilities (Associated Bank v. CA)
15. In a case of merger, the employees of the
absorbed corporation/dissolved corporation
are automatically absorbed by the
absorbing/surviving corporation?
- Employees of the absorbed or dissolved
corporation are automatically absorbed by the
surviving corporation even in the absence of a
resolution to that effect because it is more in
keeping with social justice and full protection to
labor. Nevertheless, the surviving corporation has
the right to terminate the employment of the
absorbed employees for a lawful or authorized
cause. In the same way, the absorbed employees
have the right to resign, retire or otherwise sever
their employment with the surviving corporation
even before or after the merger or consolidation,
subject to existing contractual obligations. (BPI v.
BPI Employees Union)
16. A transferee of a certificate of stock in a non-
stock corporation, if they are transferable by
virtue of a by-law provision, has the same
right, power and authority to compel the
corporation to register the said transfer in the
corporate books in his name, in order that he
may be considered as a shareholder, in the
same manner that the transferee of a
certificate of stock in a stock corporation may
do so.
- True (Sec. 87, last par.), the provision governing
stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as
may be covered by specific provisions of this
Title.
17. A corporation sole is possessed with the same
power, rights and privileges, to own, acquire
and hold or convey properties like any other
corporation.
- False, they have the same power rights and
privileges, but when it comes to alienation and
acquisition, it must possess a court order,
however when there is a regulated method, a
court order may be dispensed with.
18. All educational corporations must have a
governing board of only either 5, 10 or 15
members.
- False, only educational institutions organized as
non-stock corporations must have such number
of governing board. Those organized as Stock
Corporation may be within 5 to 15.
19. An educational institution can have 9 members.
- True, in case of educational institution organized
as Stock Corporation whose number may be
within 5 to 15.
20. A corporation sole may validly sell/transfer its
old van for purposes of acquiring a new one
without court order?
- True. In case of personal property, intervention
of courts shall not be necessary.
21. The winning bidder in a delinquency sale is the
highest bidder?
- False. The winning bidder is the lowest bidder
from the wordings of the statute. The bidder who
tenders to pay the full amount of the delinquency
plus cost and expenses, if any for the least
number of shares.
22. The beneficial owner of a voting trust
agreement may validly transfer his shares by a
mere notarized deed?
- True.
Two modes of transferring shares of stock:
1. When the corporation has already issued stock
certificates – transfer is done only through endorsement and
delivery of the certificate or certificates of stock indorsed by
the owner or his attorney-in-fact or other person legally
authorized to make the transfer.
2. When the corporation has not yet issued certificates
of stock – by a duly notarized deed. If a certificate of stock
has been issued a mere notarized deed will not suffice. It must
be coupled with endorsement and delivery of the stock
certificate.
24. A director whose shares are declared
delinquent does not automatically cease to be a
director?
- True, Sec. 71.
 25. Absent any rules and regulations of SEC
regarding short sale, any person engaging
thereto may be subjected to the penal
sanctions of Sec. 73 SRC
- True. Any violation of the laws may result
toimposition of administrative sanction (Sec.
54)and penal sanctions (Sec. 73). This is
withoutprejudice to civil liabilities provided for
undersection 56.
26. A SH issued no par value shares below their
determined issued value as indicated in AOI is
solidarily liable with the responsible
directors/officers for the water in the stock
- True. Sec. 65, any director or officer of a
corporation consenting to the issuance of stocks
for a consideration less than its par shall be
solidarily liable with SH concerned to the
corporation and its creditors.
27. Pending issuance of the replacement
certificate, the owner of a lost certificate of
stock may validly transfer his shares by a mere
notarized deed
- False.
- False. Appraisal right may be exercised on certain
instances, Sec. 81 of the Corporation Code does
not include amendment of by-laws in its
enumeration of the instances when appraisal
right may be exercised by a SH. Although said
enumeration is not exclusive, a by-law
amendment may not still fall under these
instances because it does not result in the
changing or restricting the rights of the SH, but
merely affects internal governance of the
corporation.
32. Pre-emptive right is available to shares issued
in exchange for corporate property.
- False. Sec. 39 of the Corporation Code expressly
provides that pre-emptive right shall not extend
to shares to be issued in good faith with the
approval of the SH representing 2/3 of the
Outstanding Capital Stock in exchange for
property needed for corporate purposes.
- True. In case of a close corporations, pre-
emptive right of SH is broader as it include all
issues without exception.

Two modes of transferring shares of stock:

1. When the corporation has already issued stock

certificates – transfer is done only through endorsement and
delivery of the certificate or certificates of stock indorsed by
the owner or his attorney-in-fact or other person legally
authorized to make the transfer.

2. When the corporation has not yet issued certificates

of stock – by a duly notarized deed. If a certificate of stock
has been issued a mere notarized deed will not suffice. It must
be coupled with endorsement and delivery of the stock
certificate.

28. The averment of a Foreign Corporation’s

capacity to sue is not necessary for it to gain
access to our court if it is merely defending a
suit files against it
- True. Time v. Reyes

29. It is not the lack of the requisite license but the

doing business without a license that bars a
foreign corporation from access to our courts
- True. Universal Shipping v. IAC

30. Purchase of treasury shares is equivalent to

subscription.
- False. The basic distinction between the purchase
of treasury shares and subscription is that, while
the former refers to purchase of issued shares
which have been fully paid, the latter refers to
the acquisition of unissued stock of a corporation.

31. In the amendment in the by-laws, appraisal

right is available
OBJECTIVES
1. What is appraisal right?
- Right to withdraw from the corporation and
demand payment of the fair value of his shares
after dissenting from certain corporate acts
involving fundamental changes in corporate
structure (Sec. 81)
2. Enumerate three (3) specific instances when
this right may be exercised?
- (a) In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares
of any class, or of extending or shortening the
term of corporate existence;
- (b) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
- (c) In case of merger or consolidation.
3. Effects of declaration of delinquency vis‐à‐vis,
the rights of the stockholder:
a.) To vote and be voted upon – No delinquent
stockholder shall be voted for or be entitled to vote or
to representation at any stockholders’ meeting, nor
shall the holder thereof be entitled to any of the
rights of a stock holder except the right to receive
dividends.
b.) To receive cash and stock dividends – Any cash
dividends due on delinquent stock holder shall first be
applied to the unpaid balance on his subscription plus
cost and expenses, while stock dividends shall be
withheld until his unpaid subscription is paid in full.
4. Three methods of liquidation and their effects
on the 3 year period to liquidate the corporate
affairs.
 By the corporation it through the Board of
Directors or the governing boards.
- Effects:
a) Claims for/against the corporation not filed within 3
yrs. will become unenforceable.
b) Actions pending for or against the corporation
when the 3 yr. period expires are abated.
 By a trustee or by an assignee appointed by the
corporation.
- Effects:
a) The 3 yr. period will not apply provided that the
designation of the trustee is made within that period.
b) A dissolved corporation is still liable for all its
debts, liabilities in an action filed against it, even if the case is
filed beyond the 3 yr. period. (It may be sued even beyond the
3 yr. period)
 By appointment of a receiver.
- Effects:
a) 3 yr. period will not apply because the dissolved
corporation is substituted by the receiver who may
sue or be sued even after that period.
5. The general requirements for a valid Stock Holders’
meeting.
 Must be held on the date fixed in the by‐laws or
inaccordance with law.
 Prior notice must be given.
 It must be held in the proper place.
 It must be called by the proper party.
 Voting and quorum requirements must be met.
6. Elements of a valid By –Laws
a) It must not be contrary to law, public policy or morals.
b) It must not be inconsistent with the Articles of
Incorporation.
c) It must be general and uniform in its effect.
d) It must not impair obligations and contracts or vested
rights.
e) It must be reasonable.
7. Explain “The right of a stockholder to compel the
corporation to pay the value of his shares is broader in
a close corporation”.
a) Close Corporation – may withdraw and compel the
corporation to purchase his shares for any reason with the
limitation that the corporation has sufficient assets to cover its
liabilities exclusive of capital stocks.
b) Ordinary Corporation – unless he sells his shares, a
stock holder cannot get back his investment nor compel the
corporation to buy his shares except in the exercise of his
appraisal right.
8. Distinguish between voting rights of stock holders in
a stock corporation and members in a non-stock
corporation.
- Except as provided for in the Code, the voting right of
stockholders is inherent and they may vote the way they
please. Thus, stockholders may vote personally, or by
representative or proxy or by voting trust agreement,
executor, administrator, receiver or other legal representative
appointed by the court (Secs. 55, 58 and 59).
- On the other hand, in Non-stock Corporation, the voting
rights of members may be limited, broadened, or denied by
the by-laws (Sec. 89, first par.)
9. Explain “in cases of deadlocks in a close corporation,
the courts can interfere in the management of the
corporate affairs”.
The court has a wide discretion in the management of the
corporation in cases of deadlocks. The court can interfere
because the directors/stockholders areso divided respecting
the management of the corporations business and affairs. The
votes required for any corporate action cannot be obtained. As
a consequence, the business and affairs of the corporation can
no longer be conducted to the advantage of the stockholders.
The “business judgment rule” cannot be applied here.
10. Remedies of a stockholder who is denied inspection
of corporate books:
1) Mandamus
2) Damages either against the corporate or the responsible
officer, or
3) Criminal complaint based on Sec 144 of the Code.
11. Distribution of assets upon dissolution of non-stock
corporations
In case dissolution of a non-stock corporation in accordance
with the provisions of this Code, its assets shall be applied and
distributed as follows:
1. All liabilities and obligations of the corporation shall
be paid, satisfied and discharged, or adequate provision shall
be made therefore;
2. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which condition
occurs by reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon
a condition requiring return, transfer or conveyance by reason
of the dissolution, shall be transferred or conveyed to one or
more corporations, societies or organizations engaged in
activities in the Philippines substantially similar to those of the
dissolving corporation according to a plan of distribution
adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such
persons, societies, organizations or corporations, whether or
not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter. (Sec. 94)
12. Grounds for revocation of license (Foreign
Corporation)
1. Failure to file its annual report or pay any fees as required
by the Code;
2. Failure to appoint and maintain a resident agent in the Phils;
3. Failure, after change its resident agent or if his address, to
submit to the SEC a statement of such change;
4. Failure to submit to the SEC an authenticated copy of any
amendment to its articles of incorporation or by‐laws or if any
articles of merger or consolidation within the time prescribe by
the code.
5. Misrepresentation of any material matter in any application,
report, affidavit or other document submitted;
6. Failure to pay any and all taxes, impost, assessment or
penalties, if any, lawful due to the Phil Government or any of
its agencies or political subdivisions;
7. Transacting business in the Phils. outside of the purpose for
which such corporation is authorize under its license;
8. Transacting business in the Phils. as agent of or acting for
and in behalf of any foreign corporation or entity not duly
licensed to do business in the Phils;
9. Any other grounds as would render it unfit to transact
business in the Phils.
13. Requirements and procedure for the withdrawal of
Foreign Corporations:
1. Filing of a petition for withdrawal of license;
2. All claims which accrued in the Phils. have been paid,
compromise or settled;
3. All taxes, imposts, assessment and penalties, if any, lawfully
due to the Philippine Government or any of its agencies or
political subdivisions have been paid;
4. Publication of the petition for withdrawal once a week for 3
consecutive weeks in a newspaper of general circulation in the
Philippines; and
5. Issuance of certificate of withdrawal by the SEC.
14. Instances when a Foreign Corporation w/ no
license to do business in the Philippines can sue:
a) The act or transaction involved is an “isolated transaction;”
(Bulakhidas vs. Navarro);
b) The foreign corporation is not seeking to enforce any legal
or contractual rights arising from, or growing out of any
business which it has transacted in the Philippines;
c) The purpose of the suit is to protect its trademark,
tradename, reputation or good will. (Western Equipment and
Supply Co. vs. Reyes);
d) The suit is based on violation of the RPC; (Lechemise
Lacoste vs. Fernandez);
e) The foreign corporation is merely defending a suit filed
against it. (Time, Inc. vs. Reyes);
f) The party is estopped to challenge the personality of the
corporation by entering into a contract with it. (Communication
Materials and Design, Inc vs.CA)
15. What is dissolution?
- It is the extinguishment of the corporate franchise and the
termination of corporate existence.
General Rule: When a corporation is dissolved, it ceases to be
a juridical entity and can no longer pursue the business for
which it is incorporated.
Exception: The Corporation will continue as a body corporate
for another period of 3 years from the time it is dissolved for
the purpose of winding up its affairs and the liquidation of its
assets.
16. Three modes of dissolution:
1. By the expiration of the corporate term;
2. By voluntary surrender of its primary franchise (voluntary
dissolution); or
3. By the revocation of its corporate franchise (involuntary
dissolution).
17. Three ways in w/c a person may become a
stockholder:
1. By a contract of subscription with the corporation;
2. By the purchase of treasury shares from the corporation;
and
3. By purchase or acquisition of shares from existing
stockholders (includes purchase from the stock exchange).
18. Consideration for the issuance of stock may be any
or a combination of any two or more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed or services actually rendered to the
corporation (stocks shall not be issued in exchange of
promissory notes or future services. Their realization is
uncertain);
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares in exchange of stocks in the event of
reclassification or conversion.
19. Effects of merger and consolidation:
1. There will be a single corporation. In case of merger, the
surviving corporation, or in case of consolidation, the
consolidated corporation.
2. Termination of the corporate existence of the constituent
corporations, except that of the surviving or consolidated
corporation.
3. The surviving or the consolidated corporation will possess all
the rights, privileges, immunities and powers and shall be
subject to all the duties and liabilities of a corporation
organized under this Code.
4. The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities and franchise of the
constituent corporation, and all property and all receivables
due on whatever account, including the interest of, or
belonging to, or due to its constituents corporation shall be
deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations of
each of the constituent corporations. The rights of creditors or
liens upon the property of any such constituent corporations
shall not be impaired by such merger or consolidation.
20. The three methods of liquidation and their effects
on the 3-year period to liquidate the corporate affairs:
1. By the Corporation itself through the BOD- the Board
will only have 3 years to finish its task of liquidation, claims for
or against the corporation not filed within 3 year period will
become unenforceable as there exist no corporate entity
against which they can be enforced.
2. By Trustee appointed by the corporation- 3 year
period will not apply provided the designation of a trustee is
made within the 3-year period.
3. By appointment of a receiver on petition or
motuproprio upon the dissolution of the corporation-
the 3-year period will not apply because the dissolved
corporation is substituted by the receiver who may sue or be
sued beyond the 3-year period.
21. “Subscription for shares of stock of a corporation is
indivisible”.
- Sec. 64. No certificate of stocks shall be issued to a
subscriber until the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if
any is due, has been paid.
22. “Certificate of stock is merely quasi‐negotiable and
is non‐negotiable”.
- While it may be transferred by endorsement coupled with
delivery thereof, and therefore merely quasi-negotiable, it is
nonetheless non‐negotiable in that the transferee takes it w/o
prejudice to all the rights and defenses w/c the true and lawful
owner may have except in so far as the principles governing
estoppel may apply. (Delos Santos vs. McGrath).
23. Voting Trust Agreement
- Is one created by an agreement between a group of
stockholders of a corporation and a trustee, whereby it is
provided that for a term of years, or for a period of contingent
upon a certain event, or until the agreement is terminated,
control over the stock owned by such stockholders, shall be
lodged in the trustee.
It is a device of binding stockholders to vote as a unitand thus
assuring a desirable stability and continuity inmanagement in
situations where it is needed.
24. Highest Bidder
- Is such bidder who shall offer to pay the full amount of the
balance on the subscription together with accrued interest,
cost of advertisement and expenses of sale, for the smallest
number of shares or fraction of sale.
Grounds to question the delinquency sale:
1. Irregularities or defect on the notice of sale; or
2. Irregularities or defect in the sale itself.
25. 3 qualifying conditions required to be indicated in
AOI in order that the corporation may be considered as
a close one:
1. All the corporation’s issued stock of all classes, exclusive of
treasury shares shall be held of record by not more than 20;
2. All the issued stock of all classes shall be subject to one or
more specified restrictions on transfer;
3. The corporation shall not list in any stock exchange or make
any public offering of any of its stock of any class.
26. Twin requirement in order that the Special
Commercial Court may be justified in appointing a
management committee, board or body in a
corporation:
1. Dissipation, loss, wastage or destruction of assets or other
properties; and
2. Paralyzation of its business operations which may be
prejudicial to the interest of the minority stockholders, party’s
litigants or the general public. (SyChimvs. SySiy Ho & Sons,
Inc.)
27. The three-year period of liquidation will not apply if
a trustee/assignee/receiver is appointed to undertake
the same
- It will not apply, under Sec. 122 of the Code (2) from and
after any such conveyance by the corporation of its property in
trust for the benefit of its stockholders, members, creditors,
and others in interest, all interest which the corporation had in
the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the SH, members,
creditors, or other persons in interest.
28. If not denied by a provision in AOI, the pre-emptive
right of a corporation is absolute.
- The statement is correct, why? Because under Sec. 102, the
pre-emptive right of a close corporation shall extend to all
stock to be issued, including reissuance of treasury shares,
whether for money, property, or personal services, or in
payment of corporate debts, unless AOI provide otherwise.
29. A Director/SH whose shares are declared
delinquent is not automatically disqualified to be and
act as a director.
- The only qualification to be a director is that he must
own at least 1 share standing in his own name in the books of
the corporation. And since the shares of a director although
declared delinquent, still standing his name pending the sale,
he remains to be and act as a director. And even if there is
sale, he may still be a director because the winning bidder may
not bid or pay for all the shares or there might be remaining
shares, which would be credited in favor of the delinquent
stockholder.
DEFINITION: SRC
1. Wash Sale – any transaction in a security which
involves no change in the beneficial ownership
thereof
2. Matched Order – refers to an order/s for the
purchase or sale of security with the knowledge that a
simultaneous order/s of substantially the same:
a) Time
b) Size and
c) Prize for the sale or purchase of such security has,
or will be entered by or for the same or different
parties.
3.Wash Sale and Match Oder – When they may
become illegal:
- They must be used as means “to create a false or misleading
appearance of active trading” in the security concerned.
4.Short Sale
- Selling security w/c the vendor does not own.
- Illegal per se, unless done in accordance w/ the rules and
regulations of the SEC.
5.Insider Trading
General Rule: An insider may not sell or buy a security of the
issuer while in possession of material information with respect
to the issuer or the security that is not generally available to
the public.
Exceptions:
1. The insider proves that the information was not gained from
such relationship; or
2. The insider disclosed the information to a party reasonably
believed by the insider to possess the information.
6.Who is an insider?
a) The issuer;
b) A director or officer (or person performing a similar
functions) of, or a person controlling the issuer;
c) A person whose relationship or former relationship to the
issuer gives or gave him access to material information about
the issuer or the security that is not generally available to the
public;

d) A government employee, or director, or officer of an

exchange, clearing agency and/or self-regulating organization
who has access to material information about an issuer or a
security that is not generally available to the public; or

e) A person who learns as such information by communication

from any of the foregoing insiders.

7.Marking the close – the placing of purchase/sale order, at

or near the close of the trading period.

Note: Marking the close, painting the tape, squeezing the float,
hype and dump, and boiler room operations are illegal when
they are effected to

1. Raise the price or induce the purchase of a security or

controlling, controlled or commonly controlled company by
others;

2. Depress their price to induce the sale of asecurity, whether

of the same or of a differentclass, of the same issuer or of a
controlling,controlled company, or common controlledcompany
of others; and

3. Creates active trading to induce such purchase or sale

through said devises or schemes.
ESSAY:
PROBLEM 1. A is the president of X co, Inc. who used
his own properties to secure and guaranty a loan for
the corporations operational needs from Z Financial,
Inc.
When the funds were released, B, the chairman of the
Board misappropriated 10M for his personal use. The
minority stockholders later charge B for estafa under
the RPC and by virtue of the misappropriation, the
minority of the board and stockholders filed a petition
for suspension of payments for all claims against the
corporation w/c was granted by the proper forum.
a) B files a motion to dismiss the estafa cases alleging
that since the matter involves an intracorporate controversy,
the case falls w/in the exclusive jurisdiction of the Special
Commercial Court. Rule and explain.
ANSWER:
General Rule: The Special Commercial Courts shall have
original and exclusive jurisdiction to hear and decide cases
involving devices or schemes employed by or any acts of the
board of directors, business associates, its officers or partners,
amounting to fraud and misrepresentation w/c may be
detrimental to the interest of the public and/or of the
stockholder, partners, members of associations or organization
registered with the SEC.
Exception: The complaint is based on the violation of the
Revised Penal Code (Ex. Estafa). Criminal case is personal in
nature and not against the corporation.
In order that there be an intra‐corporate controversy. The
following must occur:
1. An intra‐corporate relationship:
a) Between and among the stockholders, members, associates
of a corporation, partnership or association;
b) Between them and the corporation, partnership or
association; or
c) Between the corporation, partnership or association and the
State.
2. The controversy must arise out of said relationship.
Note: If the petitioner does not have a “prima facie” title to the
shares sought to be recorded in his name, the dispute is not
intra‐corporate and the ordinary or regular court can assume
jurisdiction over the case. (Rivera vs. Florendo; Tay vs. CA)
The dispute among the parties must be intrinsically connected
with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character
necessarily the case does not involve an intra‐corporate
controversy (Speed Distributing Corp. vs. CA)
b) After the grant of suspension of payments order, z Financial
Inc. proceeds to extra‐judicially foreclose on the properties of
“A” who moves for exception x xxIs the contention of A
correct?
No, the contention of A is incorrect, citing the decision in the
Union Bank case, that if a corporation secures a loan, and one
of its key officers uses his private properties to guarantee the
loan, corporation files for suspension, the bank may foreclose
the property because it is not an action for a claim against the
corporation.
Note: The reason for suspension of payments for claims
against a distressed corporation is to enable the management
committee to effectively exercise its powers free from judicial
or extrajudicial interference that might unduly hinder or
prevent the “recue” of the debtor company. (PAL vs.Sps. Sadic
and Kurangkingking)
Equality and Equity – during suspension the assets are held
in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by
the expediency of an attachment, execution or otherwise. The
creditors should stand on equal footing. Not anyone of them
should be given any preference by paying one of them ahead
of the others. (AlemarsSibal and Son, Inc. vs. Elibenas)
PROBLEM 2. X is the owner of 1M shares are being
traded at P1.00 per share. He has an account in two
broker firms, B1 and B2. He directs B1 to sell 250T
shares at 10.30 at P1.25 per share and at 10.32, he
directs B2 to buy the same number of shares at the
same price.
a. Can X be held liable for wash sale and matched
order? Explain.
b. If he sells shares of stock which he does not own,
what unlawful act will be committing?
ANSWER:
a. Yes. There is wash sale because there is no change in
beneficial ownership of the security involved. In this case, a
series of buy and sale transaction is placed by one and same
beneficial owner who is X in the exchange which would not
affect any change of ownership of the shares transacted.
There is matched order because there is knowledge of
simultaneous order of substantially the same size, time and
price for the sale and purchase of the security.
b. He committed short sale because it is defined as
selling security which the vendor does not own which is illegal
per se under Sec. 24.2 of the SRC.
PROBLEM 3. Z corp. was registered in 1978 or before
the effectivity of the Corporation Code. The by –laws of
the corporation allow it to issue certificate of stock
covering the corresponding number of shares w/c the
subscriber may have already paid.
A subscribed to 1M shares w/a PV of 1.00/share and
have paid 500K on his subscription. He now compels
the Corporation to issue a stock certificate covering
500K shares.
a) The corporation seeks your advice as counsel. What advice
will you give? Explain.
ANSWER:
Sec. 64. Issuance of stock certificates – No certificate of stock
shall be issued to a subscriber until the full amount of his
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid. Thus, A
should comply with the Corporation Code.
A stockholder whose subscription is not fully paid may not be
issued a stock certificate for that portion already paid. (Fua
Chan vs. Summers and China Banking Corporation)
General Rule: Holders of subscribed shares not fully paid are
entitled to all the rights of a stockholder.
Exception: That the shares have been declared delinquent; or
the stockholder exercises his appraisal right.
b) Assume that A is now the owner of the stock certificate No.
008. B, his brother stole the certificate, forged the signature of
A and sold the same to C, who is a purchaser in good faith and
for value. Who has a better right over the shares covered by
stock certificate No. 008? A or B? Explain.
ANSWER:
A still has a better right over the shares under the doctrine of
non‐negotiability of certificate of stock.
General Rule: In forged or unauthorized transfer of stock the
purchaser acquires no title as against the lawful owner and will
have no right or remedy against the corporation
(non‐negotiability of stock certificates).
b) Assume that C transfers the said stock certificate to
D. Who is also a bona fide purchaser, will D acquire title?
Explain.
ANSWER:
No, same basis to the previous answer.
c) Assume that before C transferred the shares, he
surrendered the said stock certificate to the corporate
secretary for the registration/cancellation and for issuance of a
new stock cert in his (C’s favor). The corporation cancelled the
said stock certificate and issued stock certificate No. 010 in the
name of C, who thereafter transferred the latter certificate by
endorsing and delivering it to D. Will D acquire title? Explain.
ANSWER:
Yes, D will acquire title to the stock certificate No. 010 as this
would be the exception to the general rule.
Exception: The Corporation will be estopped to deny the
validity thereof. The subsequent purchaser in good faith took
the shares by virtue of the genuiness of the certificates issued
by the corporation or of the representation made by the
corporation that the same is valid and subsisting and that the
person named therein is a stockholder of the corporation.
d) Will A be deprived of his title? Explain.
ANSWER:
No, A cannot be deprived of his right by virtue of an
unauthorized transfer. He can go to the corporation and ask
for the cancellation of the stock certificate due to fraud or
forgery. D may compel the corporation to recognize him as a
stockholder or claim reimbursement and damages against the
latter.
e) Assume that the corporation has unissued and unsubscribed
shares worth 20M and the corporation want to issue them at
the PV of P1.00/share instead of its FMV of P2.00/share. They
seek your advice as counsel if they can do so issued at P1.00.
What advice will you give? Explain.
ANSWER:
Yes, they can issue it at the PV of P1.00/share, because it is
not below the par value. There is no watered stock because
the basis of watered stock is the par value and not the fair
market value.
Ways in which watered stock may be issued:
1. For monetary consideration less than its par or issued value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under agreement that nothing shall be paid
at all; or
4. In the guise of stock dividends when there are no surplus
profits of the corporation.
g) Further, assume that the corporation enters into a contract
of sale/purchase of some of its remaining unsubscribed shares
w/ X who pays a down payment of 50% w/ a condition that he
(X) will not be considered as a stockholder until the full
payment of the acquisition cost and that then and only then
shall be issued a stock certificate. Pending payment of the
balance, the properties, inventories and all assets of the
corporation was razed in fire. The corporation now wants to
collect the unpaid portion of the acquisition cost of the shares.
X seeks exception in that the contract is one of sale, and the
obligation of the parties is reciprocal and dependent on one
another. Rule and Explain.
ANSWER:
- YES, no matter how the party refer to it, it is considered
subscription
- Once you subscribe, you become a stockholder which is
entitled to all the liabilities of a stockholder.
- The acquiring stockholder is much bound to pay the debt
owing to the corporation. Unpaid subscriptions will be a debt
owing to the corporation.
PROBLEM 4: A subscribed 100,000 shares valued ar
1M. He paid 500,000, so he has a balance of 500,000.
The Corporation is in dire need of money for the
operation of its business so the BOD decided to make a
call for the unpaid portion of the subscription of A. The
Corporation has debts amounting to 10M, and in order
to raise funds to pay the indebtedness, they made a
call for the unpaid portion of the subscription of SH
including A. It specified the date when it should be
paid. A did not pay, A's 100,000 shares are now
delinquent and the BOD can now sell these shares at a
Public Auction subject to publication. There is an
additional cost of 5,000. So you now have 505,000.
There are no bidders, no bidder appeared. May the
Corporation bid?
ANSWER:
No, the corporation may bid subject to the provisions of this
Code. This is acquisition of its own shares and as a rule, a
corporation cannot generally reacquire its own shares if it has
no Unrestricted Retained Earnings. The corporation cannot bid.
It must have unrestricted retained earnings as a General Rule.
The issuer, director or officer or any person performing similar
functions or a person controlling the issuer. A person whose
relationship or former relationship to the issuer gives or gave
him access to material information about the issuer or the
security that is not generally available to the public.
The printer in this case was able to gain access to material
information about the issuer that is not generally available to
the public. He’s a person whose relationship or former
relationship with respect to the issuer gave him access to the
information. He is also an insider.
Even government employees, directors or officers of an
exchange or clearing agencies or any person who learns such
information by communication from any of these persons
would be considered insiders.

a.) IF THE CORPORATION CANNOT BID BECAUSE IT

HAS NO UNRESTRICTED RETAINED EARNINGS, IS
THE CORPORATION NOW LEFT WITHOUT RECOURSE
TO ENFORCE PAYMENT OF THE UNPAID
SUBSCRIPTION OF A?

ANSWER:

No. It can go for a Direct Action in Court.

PROBLEM 5:A's shares are delinquent, he is a director

of the corporation. Pending the sale of his shares, is he
still qualified to be a director?

Ownership of shares of stocks standing in his name in

the books of the corporation is the qualification in
order that one may be a director. Will he lose his right
to be a director?

ANSWER:

No, until and unless all his shares are bidded out and sold to
the winning bidder, he remains the owner of the shares of
stock. It is still registered in his name in the books of the
corporation. Therefore, he remains as a stockholder, and even
if it may be sold at public auction, he can still continue acting
as the director.

PROBLEM 6: Manila Gas Corporation is engaged in the

search and drilling of natural gas. It was able to drill a
natural gas of commercial quantity. They did not
disclose the same to the general public. What they did,
was the directors and officers bought the shares in the
stock exchange of Manila gas itself. They did never
disclose to the public. On the following day, knowing
that it is illegal for them to trade in the particular
security, they went to a printer in order to disseminate
the information that in fact they were able to drill a
natural gas of commercial quantity. The printer,
looking at the data, instead of printing it immediately,
also bought the shares of manila gas before he printed
the material. What is the offense committed by the
officer of the Corporation and/or the printer if any? Is
he liable? Who is an insider?

ANSWER:

Insider Trading. Yes, he is liable. Sec. 3.8, Section 3.8