2007 BAR
Corporation to issue to him the stock certificate corresponding to the
Stockholders; Appraisal Right (2007)
No.VII. In a stockholders meeting, S dissented from the corporate act
converting preferred voting shares to non-voting shares. Thereafter,
S submitted his certificates of stock for notation that his shares are
dissenting. The next day, S transferred his shares are dissenting.
The next day, S transferred his shares to T to whom new certificates
were issued. Now, T demands from the corporation the payment of
the value of his shares. (10%)
(A) What is the meaning of a stockholder’s appraisal right?
ANSWER: Appraisal right is the right of stockholder, who dissents
from a fundamental or extraordinary corporate action, to demand
payment of the fair value of his shares. It is the right of a stockholder
to withdraw from the corporation and demand payment of the fair
value of his shares after dissenting form certain corporate acts
involving fundamental changes in the corporate structure (Section 81,
Corporation Code).
(B) Can T exercise the right of appraisal? Reason briefly?
ANSWER: No, T cannot exercise the right of appraisal in this case.
When S transferred his shares to T and T was issued new stock
certificates, the appraisal right of S ceased, and T acquired all the
rights of a regular stockholder. The transfer of shares from S to T
constitutes an abandonment of the appraisal right of S. All the T
acquired from the issuance of new stock certificated was the rights of
a regular stockholders (Section 86, Corporation Code).
Trust Fund Doctrine (2007)
No.VI. Discuss the trust fund doctrine. (5%)
ANSWER: The trust fund doctrine means that the capital stock,
properties and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. Stated simply, the trust
fund doctrine states that all funds received by the corporation in
payment of the shares of stock shall be held in trust for the corporate
creditors and other stockholders of the corporation. Under such
doctrine, no fund shall be used to buy back the issued shares of
stock except only in instances specifically allowed by the Corporation
Code (Boman Environmental Development Corporation v. Court of
Appeals, 167 SCRA 540 [1988]).
2008 BAR
Dividends; Declaration of Dividends (2008)
No.XIV. Ace Cruz subscribed to 100,000 shares of stock of JP
Development Corporation, which ahs a par value of P1 per share. He
paid P25,000 and promised to pay the balance before December 31,
2008. JP Development Corporation declared a cash dividend on
October 15, 2008, payable on December 1, 2008 (A) For how many
shares is Ace Cruz entitled to be paid cash dividends? Explain. (2%)
ANSWER: Ace Cruz is entitled to be paid each cash dividends to the
entire 100,1000 shares subscribed, and not only to the paid-up
portion thereof. The legal character of being a “stockholder,” and
therefore the entitlement to all the rights of a stockholder, are
determined from the time of “subscription” and not from payment of
the subscription. Under Sec. 43 of the Corporation Code, “a stock
corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or in stock to all
stock-holders on the basis of outstanding stock held by them” on not
on the basis on what stocks have been paid.
ALTERNATIVE ANSWER: Under Sec. 71, only when a stockholder
has been declared delinquent do his rights as stockholder become
suspended. It means therefore that a stockholder who has not paid
the full subscription, provided he is not declared delinquent has
complete exercise of all of his rights, including the right to receive
dividends. But any cash dividends due on delinquent stock shall first
be applied to the unpaid balance of the subscription (Sec. 43,
Corporation Code).
(B) On December 1, 2008, can Ace Cruz compel JP Development
P25,000 paid by him? (2%)
ANSWER: No, Ace Cruz cannot compel JP Development
Corporation to issue him the stock certificate for the P 25,000.00. No
Certificate of Stock can be issued to a subscriber until the full amount
of his subscription together with interest and expense, if any is due,
has been paid. A Subscription is one, entire and indivisible whole
contract which cannot be divided into portions. The stockholder is not
entitled to a Certificate of Stock until he has remitted the full amount
of his subscription (Sec. 64, Corporation Code; SEC Opinion
[January 6, 1989]).
Piercing the Corporate Veil (2008)
No.X. Nelson owned and controlled Sonnel Construction Company.
Acting for the company, Nelson contracted the construction of a
building. Without first installing a protective net atop the sidewalks
adjoining the construction site, the company proceeded with the
construction work. One day a heavy piece of lumber fell from the
building. It smashed a taxicab which at that time had gone offroad
and onto the sidewalk in order to avoid traffic. The taxicab passenger
died as a result.
Assume that the company had no more account and property in its
name. As counsel for the heirs of the victim, whom will you sue for
damages, and what theory will you adopt? (3%)
ANSWER:
I would sue Nelson, as the person who owned and controlled Sonnel
Contruction Company, under the doctrine of “piercing the veil of
corporate fiction.” Although a corporation has a juridical personality
separate and distinct from that of its stockholders, when the
corporation is used merely as an alter ego or controlled for the
benefit of a stockholder, or when it is necessary to render justice,
then the courts have the right to pierce the veil of corporate fiction to
hold the controlling stockholder-officer personally liable for the
corporate tort or wrong committed. The contractor should also be
held liable, since being an independent contractor it is liable for the
fault or negligence of its people.
(B) If you were the counsel for Sonnel Construction, how would you
defend your client? What would be your theory? (2%)
ANSWER:
I would use the theory that the company cannot be held liable for
damages because there was no fraud or negligence by its officers in
undertaking the project for the construction of the building or the
selection of a construction company. Since a contractor is not an
agent of Sonnel Construction, the latter cannot be held liable for the
contractor’s negligence. I would also argue that piercing the veil of
corporate fiction is a remedy of last resort and cannot be availed of
without clear evidence showing fraud or disrespect of the separate
juridical personality of the corporation. Mere control of equity has not
been considered as sufficient basis for piercing the veil.
(C) Could the heirs hold the taxicab owner and driver liable? Explain.
(2%)
ANSWER: Yes, the taxicab company can be liable for damages
because it failed to comply with its obligation as a common carrier to
use extraordinary diligence in transporting the passenger, and
because at the time of death of the passenger, the cab driver was
violating a traffic regulation. Under Art. 2185 of Civil Code, it is
presumed that a person driving a motor vehicle has been negligent if
at time of mishap he was violating a traffic regulation, such as when
he was driving on the wrong side of the road (Mallari, Sr. v. CA, G.R.
No. 128607, 31 January 2000).
BOD; Conflict of Interest; Ratification (2008)
No.XII. Pedro was 70% of the subscribed capital stock of a company
which owns an office building. Paolo and Juan own the remaining
stock equally between them. Paolo also owns a security agency, a
janitorial company and a catering business. In behalf of the office
building company, Paolo engaged his companies to render their
services to the office building. Are the service contracts valid?
Explain. (4%)
Answer:
The contracts of Paolo, who owns 15% of the Outstanding Capital
Stock of the office building company is concerned if they were not
approved by the Board of Directors and Paolo was not designated to
execute them on behalf of said company. On the other hand, if the
contracts were duly approved by the Board of Directors of the office
building company with Paolo duly designated as company
representative, they would nevertheless be voided at the option of
the company. Under Sec. 32 of the Corporation Code. “A contract of
the corporation with one or more of its directors or trustees or officers
is voidable at the option of such corporation, unless all the following
conditions are present,” (a) if Paolo as a director in the board meeting
in which the contracts were approved was not necessary to constitute
a quorum for such meeting; (b) Paolo’s vote at such meeting was not
necessary for the approval of the contracts; (c) Each of the contract
are fair and reasonable under the circumstances.
If condition (a) or (b) is absent, Sec, 32 requires that the contracts
must be ratified by the shareholders representing at least two-thirds
(2/3) of outstanding capital stock, provided that there was full
disclosure of
the adverse interest of Paolo to Pedro
Formation; Enactment of a Law (2008)
No.XI. (A) Since February 8, 1935, the legislature has not passed
even a single law creating a private corporation. What provision of
the Constitution precludes the passage of such a law? (3%)
Answer:
Under Sec. 16, Art. XII of the 1987 Constitution, Congress cannot,
except by general law, provide for the formation, organization, or
regulation of private corporations. It is only government owned or
controlled corporations that may be created or established through
special charters. Consequently, it has been held that a private
corporation created pursuant to a special law is a nullity, and such
special law is void for being in violation of the Constitution (NDC v.
Phil. Veterans Bank, G.R. Nos. 84132-33, 10 December 1990).
B) May the composition of the board of directors of the National
Power Corporation (NPC) be validly reduced to three (3)? Explain
your answer fully. (2%)
Answer:
The NPC Board may be reduced to only three (3) members, but this
would have to be affected by legislative amendment of its charter.
The National Power Corporation (NPC is a chartered government
corporation, not governed by the general provisions of the
Corporation Code which requires that Boards of Directors of private
corporations shall not have less than 5 members. The provisions of
the Corporation Code are applicable to government corporations only
in a suppletory manner.
===============
2009 BAR
Derivative Suit; Jurisdiction (2009)
No.II. Atlantis Realty Corporation (ARC), a local firm engaged in real
estate development, plans to sell one of its prime assets—a three-
hectare land valued at about P100-million. For this purpose, the
board of directors of ARC unanimously passed a resolution
approving the sale of the property for P75-million to Shangrila Real
Estate Ventures (SREV) a rival realty firm. The resolution also called
for a special stockholders meeting at which the proposed sale would
be up for ratification. Atty. Edric, a stockholder who owns only one (1)
share in ARC, wants to stop the sale. He then commences a
derivative suit for and in behalf of the corporation, to enjoin the board
of directors and the stockholders from approving the sale.
(A) Can Atty. Edric, who owns only one share in the company, initiate
a derivative suit? Why or why not? (2%)
ANSWER: Yes, Atty. Edric can initiate a derivative suit, otherwise
known as the minority stockholders’ suit. It is allowed by law to
enable the minority stockholder/s to protect the interest of the
corporation against illegal or disadvantageous act/s of its officers or
directors, the people who are supposed to protect the corporation
(Pascual v. Del Zaz Orozco, 19 Phil. 82 (1991)).
(B) If such a suit is commenced, would it constitute an intra-corporate
dispute? If so, why and where would such a suit be filed? If not, why
not? (2%)
ANSWER:
Yes, such suit would constitute an entra-corporate dispute as it is a
suit initiated by a stockholder against other stockholders who are
officers and directors of the same corporation (P.D. No. 902-A, Sec.
5(b)). Such suit should be filed in the Regional Trial Court designated
by the Supreme Court as a corporate or commercial court.
(C) Will the suit prosper? Why or why not? (3%)
ANSWER: No. The suit will not prosper. There is no requisite
demand on the officers and directors concerned. There is, therefore,
no exhaustion of administrative remedies.
Dividends; Declaration of Dividends (2009)
No.I. Dividends on shares of stocks can only be declared out of
unrestricted retained earnings of the corporation.
ANSWER: True. Dividends on shares of stock of a corporation,
whether cash dividend or stock dividend, can be validly declared only
out of unrestricted retained earnings (Sec. 43, Corporation Code). It
cannot be declared out of the capital. Otherwise, such declaration of
dividend will violate the trust fund doctrine.
Dividends; Declaration of Dividends (2009)
No.XVI. On September 15, 2007, XYZ Corporation issued to Paterno
eight hundred preferred shares with the ff. terms: ― The Preferred
Shares shall have the ff. rights, preferences, qualifications, and
limitations, to wit: (1) The right to receive a quarterly dividend of One
per Centum cumulative and participating; (2) These shares may be
redeemed, by drawing of lots, at any time after two years from date
of issue, at the option of the Corporation; xxx Today, Paterno sues
XYZ Corporation for specific performance, for the payment of
dividends on, and to compel the redemption of , the preferred shares,
under the terms and conditions provided in the stock certificates. Will
the suit prosper? Explain. (3%)
ANSWER: No. the suit will not prosper. Paterno cannot compel XYZ
Corporation to pay dividends, which have to be declared by the
Board of Directors and the latter cannot do so, unless there are
sufficient unrestricted retained earnings. Otherwise, the corporation
will be forced to use its capital to make said payments in violation of
the trust fund doctrine. Likewise, redemption of shares cannot be
compelled. While the certificate allws such redemption, the option
and discretion to do so are clearly vested in the corporation (Republic
Planters Bank v. Agana, 269 SCRA 1 [1997]).
Stock and Transfer Book (2009)
No.XVIII. (C) What is a stock and transfer book? (1%)
ANSWER: A Stock and transfer book is a book which records all
stocks in the name of the stockholders alphabetically arranged; the
installments paid or unpaid on all stocks for which subscription has
been made and the date of payment of any installment, a statement
of every alienation, sale or transfer of stock made, the date thereof,
and by and to whom made; and such other entries as the by-laws
may prescribe (Section 74, Corporation Code).
Stockholders; Contractual Relationship; Quorum (2009)
No.XVIII. Triple a Corporation (Triple A) was incorporated in 1960,
with 500 founders’ shares and 78 common shares as its initial capital
stock subscription. However, Triple A registered its stock and transfer
book only in 1978, and recorded merely 33 common shares as the
corporation’s issued and outstanding shares. (A) In 1982, Juancho,
the sole heir of one of the original incorporators filed a petition with
the Securities and Exchange Commission (SEC) for the registration
of his property rights over 120 founder’s shares and 12 common
shares. The petition was supported by a copy of the Articles of
Incorporation indicating the incorporator’s initial capital stock
subscription. Will the petition be granted? Why or why not? (3%)
ANSWER:
Yes. The articles of Incorporation define the charter of the
corporation and the contractual relationship between the State and
the Corporation, the State and the stockholders, and between the
corporation and the stockholders. Its contents are thus binding upon
both the corporation and the stockholders, conferring on Juancho a
clear right to have his stockholding recorded (Lanuza v. Court of
Appeals, 454 SCRA 54 (2005)).
(B) On May 6, 1992, a special stockholders’ meeting was held. At this
meeting, what would have constituted a quorum? Explain. (3%)
ANSWER: A quorum consists of the majority of the totality of the
shares which gave been subscribed and issued. Thus the quorum for
such meeting would be 289 shares or a majority of the 576 shares
issued and outstanding as indicated in the article of incorporation.
This includes the 33 common shares reflected in the stock and
transfer book, there being no mention or showing of any transaction
effected from the time of Triple A’s incorporation in 1960up to the
said meeting (Section 52 in Relation to Section 137 of corporation
Code; Lanuza v. court of Appeals, 454 SCRA 54 (2005)).
Ultra Vires Acts (2009)
When is there an ultra vires  act on the part of (a) the corporation; (b)
the board of directors; and (c) the corporate officers? (3%)
(A) the corporation;
ANSWER: Under Section 45 of the Corporation Code, no corporation
shall possess or exercise any corporate power except those
conferred by the Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of the powers so
conferred. When a corporation does an act or engages in an activity
which is outside of its express, implied or incidental powers set out in
its articles of incorporation, the act is deemed to be ultra vires.
  (B) the board of directors;
ANSWER: When the Board engages in an activity or enters into a
contract without the ratificatory vote of the stockholders in those
instances where the Corporation Code so Requires such ratificatory
vote, such as when the corporation is made to invest in another
corporation or engage in a business which is not in pursuit of its
primary purpose, the board resolution not ratified by stockholders
owning or representing at least two-thirds of the outstanding capital
stock would make the transaction void, as being ultra vires.
(C) the corporate officers
ANSWER: When a corporate officer enters into a contract on behalf
of the corporation without having been so expressly or impliedly
authorized by the Board of Directors, even when the act or contract
falls within the corporation’s express, implied or incidental power,
then the unauthorized act of the corporate
2010 BAR
Corporation; Sole Proprietorship (2010)
No.IX. Your client Dianne approaches you for legal advice on putting
up a medium-sized restaurant business that will specialize in a novel
type of cuisine. As Dianne feels that the business is a little risky, she
wonders whether she should use a corporation as the business
vehicle, or just run it as a single proprietorship. She already has an
existing corporation that is producing meat products profitably and is
also considering the alternative of simply setting up the restaurant as
a branch office of the existing corporation.
(A) Briefly explain to your client what you see as the legal
advantages and disadvantages of using a separate corporation, a
single proprietorship, or a branch of an existing corporation for the
proposed restaurant business. (3%)
ANSWER: If Dianne will set up a separate corporation, her liability for
its obligations and losses will be limited to the amount of her
subscription in the absence of showing that there is a ground to
disregard its separate juridical personality. If she were to operate a
single proprietorship, her liability for its debts and losses will be
unlimited. The formation and the operation of a corporation require a
great deal of paper work and record-keeping. This is not the situation
in the case of a single proprietorship. If Dianne will form a separate
corporation, it can raise more funds for the business than if she were
to set up a single proprietorship.
If she were to set up the restaurant as a branch office an existing
corporation, the corporation will have more funds as capital than if
she were to form a separate corporation. However, all the assets of
the existing corporation will be liable for the debts and losses of the
restaurant business.
(B) If you advise your client to use a corporation, what officer
positions must the corporation at least have?(2%)
ANSWER: The corporation must have at least five directors (Section
14 of the Corporation Code). It Must also have a president, a
treasure, and secretary (Section 25 of the Corporation Code).
(C) What particular qualifications, if any, are these officers legally
required to possess under the Corporation Code? (2%)
ANSWER: Every director must own at least one share of the capital
stock of the corporation, which must be recorded in his name on the
books of the corporation, and a majority of the directors must be
residents of the Philippines (Section 25 of the Corporation Code).
The president must also be a director. The secretary must be a
resident and citizen of the Philippines (Section 25 of the Corporation
Code).
2012 BAR
BOD; Qualifications (2012)
No.VI. X is a Filipino immigrant residing in Sacramento, California. Y
is a Filipino residing in Quezon City, Philippines. Z is a resident alien
residing in Makati City. GGG Corporation is a domestic corporation -
40% owned by foreigners and 60% owned by Filipinos, with T as
authorized representative. CCC Corporation is a foreign corporation
registered with the Philippine Securities and Exchange Commission.
KKK Corporation is a domestic corporation (100%) Filipino owned. S
is a Filipino, 16 years of age, arid the daughter of Y. (A) Who can be
incorporators? Who can be subscribers? (2%)
Answer:
X,Y,Z and T could all be incorporators and subscribers. Note,
however, that Sec.10 of the Corporation Code requires that there
must be at least five but not more than fifteen incorporators (who
must all be natural persons) and that a majority of the incorporators
must be residents of the Philippines. S, being a minor, could neither
be an incorporator nor a subscriber. GGG Corporation, CCC
Corporation, and KKK Corporation, CCC Corporation, and KKK
Corporation could not be incorporators as they are not natural
persons. However, they could be subscribers.
(B) What are the differences between an incorporator and a
subscriber, if there are any? (2%)
ANSWER:
Some of the differences are as follows: first, all the incorporators are
required to sign and acknowledge the Articles of Incorporation while
the subscribers, as such, are not subject to the same requirement;
second, the incorporators could be either natural or juridical persons;
and third, the number of incorporators cannot exceed fifteen while the
number of subscribers could be more than fifteen (subject to
compliance, in the appropriate cases, with the requirements of the
Securities Regulation Code).
(C) Who are qualified to become members of the board of directors
of the corporation? (2%)
ANSWER:
X,Y,Z and T could be directors (subject to the residency requirement
mentioned in (a) above and any nationality requirement under the law
governing the business of the corporation) but not GGG Corporation,
CCC Corporation, and KKK Corporation as they are not natural
persons. However, the aforementioned corporations could have their
respective representatives nominated and possibly elected as
directors by the stockholders. Each director must own at least one
share of the capital stock of the corporation (Sec.23, Corporation
Code).
(D) Who are qualified to act as Treasurer of the company? (2%)
ANSWER:
The Corporation Code does not impose any nationality or residency
requirement in respect of the Treasurer. Any such requirement or any
other reasonable requirement may be adopted by the corporation
and reflected in its by-laws, or required by the law(s) governing the
business of the corporation or a law of general application (e.g., the
Anti-Dummy Law which applies to all nationalized businesses).
Accordingly, anybody with the qualifications required under the by-
laws of the corporation or under the law(s) governing the business of
the corporation, could be elected Treasurer by the Board of Directors.
Note, however, that the Treasurer could not be the President at the
same time (Sec. 25, Corporation Code).
(E) Who can be appointed Corporate Secretary? (2%)
ANSWER:
The Secretary is required to be both a resident and a citizen of the
Philippines (Sec. 10, Corporation Code). [Note: The problem does
not state what kind of business the corporation would engaged in.
Neither does it state whether X,Y,Z and T are all of legal age and
otherwise have the capacity to enter into contracts. Accordingly, the
Answer set out below assume that the corporation would not be
engaging in a nationalized activity and that X,Y,Z and T are all of
legal age and otherwise have the capacity to enter into contracts. ]
Corporation; Dissolution (2012)
No.X. AAA Corporation is a bank. The operations of AAA Corporation
as a bank was not doing well. So, to avert any bank run, AAA
Corporation, with the approval of the Monetary Board, sold all its
assets and liabilities to BBB Banking Corporation which includes all
deposit accounts. In effect then, BBB Corporation will service all
deposits of all depositors of AAA Corporation.
(A) Will the sale of all assets and liabilities of AAA Corporation to
BBB Banking Corporation automatically dissolve or terminate the
corporate existence of AAA Corporation? Explain your answer. (5%)
ANSWERS: No, the sale of all the assets and liabilities of AAA
Corporation to BBB Banking Corporation will not result in the
automatic dissolution of termination of the existence of the former. A
decision to dissolve AAA Corporation or to terminate its corporate
existence would require a separate approval by a majority of the
Board of Directors of AAA Corporation and its stockholders holding at
least two thirds of the total outstanding capital stock, as well as the
separate approval by the Monetary Board.
(B) What are the legal requirements in order that a corporation may
be dissolved? (5%)
ANSWERS: A corporation may be dissolved voluntarily under
Section 118 (where no creditors are affected) or under Section 119
(where creditors are affected), or by shortening of the corporate term
under Section 120, or involuntarily by the SEC under Section 122, all
of the Corporation Code. Dissolution under Section 118,119 and 120
require the same corporate approvals stated in (a) above.
Note that the SEC also has the authority under Section 6 of PD 902-
A to revoke the certificate of registration of a corporation upon any of
the grounds provided by law, including the aforementioned Section 6-
A Corporation;
Liabilities; BOD; Corporate Acts (2012)
No.IX. A, B, C, D, E are all duly elected members of the Board of
Directors of XYZ Corporation. F, the general manager, entered into a
supply contract with an American firm. The contract was duly
approved by the Board of Directors. However, with the knowledge
and consent of F, no deliveries were made to the American firm. As a
result of the non- delivery of the promised supplies, the American firm
incurred damages. The American firm would like to file a suit for
damages. Can the American firm sue:
(A) The members of the Board of Directors individually, because they
approved the transaction? (2%) ANSWERS: No. In approving the
transaction, the directors were not acting their personal capacities but
rather in behalf of XYZ Corporation exercising the powers of the
corporation and conduction its business (Sec. 23, Corporation Code).
The problem contains no facts that would indicate that the directors
acted otherwise.
(B) The corporation? (2%)
ANSWERS: Yes. The Board approved the supply contract and the
General Manager entered into the contract, both of them acting on
behalf of the XYZ Corporation.
(C) F, the general manager, personally, because the non-delivery
was with his knowledge and consent? (2%) ANSWERS:
Yes, F could be sued in his personal capacity because he
knowinglyconsented to the non-delivery of the promised supplies
contrary to the contract that was duly approved by the Board of
Directors. The problem does indicate any circumstance that would
excuse or favorably explain the action of F.
(D) Explain the rules on liabilities of a corporation for the act of its
corporate officers and the liabilities of the corporate officers and
Board of Directors of a corporation acting in behalf of the corporation.
(4%)
ANSWERS: A corporation would be liable for the acts of its Board of
Directors and officers if the said acts were performed by them in
accordance with powers granted to them under the Corporation
Code, the articles of incorporation and by-laws of the corporation, the
laws and regulations governing the business of, or otherwise
applicable to, the corporation, and, in the case of officers, the
resolutions approved by the Board of Directors.
As the directors have a personality separate from that of the
corporation, they would be personally liable only if they acted wilfully
and knowingly vote for or assent to a patently unlawful act of the
corporation, or when they are guilty of gross negligence or bad faith
in directing the affairs of the corporation, or when they acquire any
personal or pecuniary interest in conflict with their duty as directors,
which acts result in damages to the corporation, its stockholders or
other persons, when they agree to hold themselves personally and
solidarily liable with the corporation, or when they are made, by a
specific provision of law, to personally answer for the corporate
action. (Sec. 31, Corporation Code).
2013 BAR
Derivative Suit; Expiration of Term (2013)
No.VIII. In the November 2010 stockholders meeting of Greenville
Corporation, eight (8) directors were elected to the board. The
directors assumed their posts in January 2011. Since no
stockholders meeting was held in November 2011, the eight directors
served in a holdover capacity and thus continued discharging their
powers. In June 2012, two (2) of Greenville Corporation’s directors -
Director A and Director B – resigned from the board. Relying on
Section 29 of the Corporation Code, the remaining six (6) directors
elected two (2) new directors to fill in the vacancy caused by the
resignation of Directors A and B. Stockholder X questioned the
election of the new directors, initially, through a letter-complaint
addressed to the board, and later (when his letter-complaint went
unheeded), through a derivative suit filed with the court. He claimed
that he vacancy in the board should be filled up by the vote of the
stockholders of Greenville Corporation. Greenville Corporation’s
directors defended the legality of their action, claiming as well that
Stockholder X’s derivative suit was improper. Rule on the issues
raised. (8%)
ANSWER:
The remaining directors cannot elect new directors to fill in the two
vacancies. The board of directors may fill up vacancy only if the
ground is not due to expiration of term, removal or increase in the
number of board seats. In this case, the term of the two directors
expired after one year. They hold-over period is not part of their term.
The vacancies should be filled up by election by the stockholders
(Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202, 2009). The
derivative suit was improper. In a derivative suit, the corporation, not
the individual stockholder, must be the aggrieved party and that the
stockholder is suing on behalf of the corporation. What stockholder X
is asserting is his individual right as a stockholder to elect the two
directors. The case partakes more of an election contest under the
rules on intra-corporate controversy (Legaspi Towers 300, Inc. v.
Muer, 673 SCRA 453, 2012).
Stockholders; Preferred Shares (2013)
No.X. Bell Philippines, Inc. (BelPhil) is a public utility company, duly
incorporated and registered with the Securities and Exchange
Commission. Its authorized capital stock consists of voting common
shares and non-voting preferred shares, with equal par values of
P100.00/share. Currently, the issued and outstanding capital stock of
BelPhil consists only of common shares shared between Bayani
Cruz, a Filipino with 60% of the issued common shares, and Bernard
Fleet, a Canadian, with 40%. To secure additional working fund,
BelPhil issued preferred shares to Bernard Fleet equivalent to the
currently outstanding common shares. A suit was filed questioning
the corporate action on the ground that the foreign equity holdings in
the company would now exceed the 40% foreign equity limit allowed
under the Constitution the for public utilities. Rule on the legality of
Bernard Fleet’s current holdings. (8%)
ANSWER:
The holding of Bernard Fleet equivalent to the outstanding common
shares is illegal. His holdings of preferred shares should not exceed
40%. Since the constitutional requirement of 60% Filipino ownership
of the capital of public utilities applies not only to voting control but
also to beneficial ownership of the corporation, it should also apply to
the preferred shares. Preferred shares are also entitled to vote in
certain corporated matters. (Gamboa v. Teves, 682 SCRA 397,
2012) The state shall develop a self-reliant and independent national
economy effectively controlled by Filipinos. (Articles II, Sec. 19, 1987
Constitution) The effective control here should be mirrored across the
board on all kinds of shares.
What does doing business in the Philippines under the Foreign
Investment Act of 1991 mean? (5%)
SUGGESTED ANSWER
The phrase “doing business in the Philippines“ under the Foreign
Investments Act of 1991 include soliciting orders; service contracts;
opening offices, whether called liaison offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totaling
1802 days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply continuity of
commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works; or the exercise of some of the
functions normally incident to and in progressi ve prosecution of
commercial gain or of the purpose or object of the business
organization; provided that passive equity investment shall not be
construed as doing business.
II.
Jason is the proud owner of a newly-built house worth P5 Million. As
a protection against any possible loss or damage to his house, Jason
applied for a fire insurance policy thereon with Shure Insurance
Corporation (Shure) on October 11, 2016 and paid the premium in
cash. It took the company a week to approve Jason’s application. On
October 18, 2016, Shure mailed the approved policy to Jason which
the latter received five (5) days later, however, Jason’s house had
been razed by fire which transpired a day before his receipt of the
approved policy. Jason filed a written claim, with Shure under the
insurance policy. Shure prays for the denial of the claim on the
ground that the theory of cognition applies to contracts of insurance.
Decide Jason’s claim with reason (5%)
SUGGESTED ANSWER
No. What governs insurance contract is the cognition theory whereby
the insurance contract is perfected only from the time the applicant
came to know of the acceptance of the offer by the insurer. In this
case, the loss occurred a day prior to Jason’s knowledge of the
acceptance by Shure of Jason’s application. There being no
perfected insurance contract, Jason is not entitled to recover from
Shure.
ALTERNATIVE ANSWER
The insurance contract may be deemed perfected allowing Jason to
recover from Shure if there is a binding note or cover receipt duly
issued by Shure to Jason.
III.
ABC Appliances Corporation (ABC) is a domestic corporation
engaged in the production and sale of televisions and other
appliances. YYY Engineers, a Taiwanese company, is the
manufacturer of television and other appliances from whom ABC
actually purchases appliances. From 2000, when ABC started doing
business with YYY, it has been using the mark “TTubes” in the
Philippines for the television units that were bought from YYY. In
2015, YYY filed a trademark application for “ITubes”. Later, ABC also
filed its application. Both claim the right over the trademark “TTubes”
for television products. YYY relies on the principle of “first to file”
while ABC involves the “doctrine of prior use”
(A) Does the fact that YYY filed its application ahead of ABC mean
that YYY has the prior right over the trademark? Explain briefly.
(2.5%).
(B) Does the prior registration also mean a conclusive assumption
that YYY Engineers is in fact the owner of the trademark “TTubes”
Briefly explain your answer. (2.5%)
SUGGESTED ANSWER
(A) No. Since YYY is not the owner of the trademark, it has no right
to apply for registration. Registration of trademark, by itself, is not a
mode of acquiring ownership. It is the ownership of a trademark that
confers the right to register the same (Birkenstock Orthopaedia
GMBH v. Philippine Shoe Expo Marketing Corporation,  G.R. No.
194307,  November 20, 2013).
(B) No. Registration merely creates a prima facie  presumption of the
validity of the registration of the registrant’s ownership of the trade
mark and the exclusive right to the use thereof. The presumption of
ownership accorded to a registrant is rebuttable and must yield to
evidence to the contrary.
IV
X’s “MINI-ME” burgers are bestsellers in the country. Its “MINI-ME”
Logo, which bears the color blue, is a registered mark and has been
so since the year 2010. Y, a competitor of X, has her own burger
which she named “ME-TOO” and her logo thereon is printed in
bluish-green. When X sued Y for trademark infringement, the trial
court ruled in favor of the plaintiff by applying the Holistic Test. The
court held that Y infringed on X’s mark since the dissimilarities
between the two marks are too trifling and frivolous such that Y’s
“ME-TOO,” when compared to X’s “MINI-ME,” will likely cause
confusion among consumers.
Is the application of the Holistic Test correct? (5%)
SUGGESTED ANSWER
The application of the Holistic Test is not correct. In cases involving
burger products, the Supreme Court has consistently applied the
dominancy test. Under the dominancy test, the focus is on the
dominant feature of the competing trademarks. Big Mak has been
held to be confusingly similar with Big Mac and so with McDo and
Mcjoy both under the dominancy test. Accordingly, MINI-ME
trademark is confusingly similar with the ME-TOO mark (M cDonald’s
Corporation v. LC Big Mak Burger, I nc., G.R. No. 143993, August 18,
2004).
V.
MS Brewery Corporation (MS) is a manufacturer and distributor of
the popular beer “MS Lite.” It faces stiff competition from BA
Brewery  Corporation (BA) whose sales of its own beer product, “BA
Lighter,” has soared to new heights. Meanwhile, sales of the “MS
Lite” decreased considerably. The distribution and marketing
personnel of MS later discovered that BA has stored thousands of
empty bottles of “MS Lite” manufactured by MS in one of its
warehouses. MS filed a suit for unfair competition against BA before
the Regional Trial Court (RTC). Finding a connection between the
dwindling sales of MS and the increased sales of BA, the RTC rules
that BA resorted to acts of unfair competition to the detriment of MS.
Is the RTC correct? Explain. (5%)
SUGGESTED ANSWER
The RTC is not correct. Hoarding, or the act of accumulating empty
bottles to impede circulation of the bottled product, does not amount
to unfair competition. BA did not fraudulently “pass off ” its product as
that of MS Lite. There was no representation or misrepresentation on
the part of BA that would confuse or tend to confuse its goods with
those of MS Lite (Coca Cola Bottlers Philippines  v. GOMEZ, G.R.
No. 154491, November 14, 2008).
VI.
Nautica Shipping Lines (Nautica) bought a second hand passenger
ship from Japan. It modified the design of the bulkhead of the deck of
the ship to accommodate more passengers. The ship sunk with its
passengers in Tablas Strait due to heavy rains brought by the
monsoon. The heirs of the passengers sued Nautica for its liability as
a common carrier based on the reconfiguration of the bulkhead which
may have compromised the stability of the ship. Nautica raised the
defense that the monsoon is a fortuitous event and, at most, its
liability is prescribed by the Limited Liability Rule. Decide the
reasons. (5%)
SUGGESTED ANSWER
The limited liability rule will not apply in this case because there was
contributory negligence on the part of the ship owner. The
reconfiguration of the bulkhead of the deck of the ship to
accommodate more passengers made the vessel
unseaworthy (Philippine American General Insurance
Company  v. Court of  Appeals,  G.R. No. 116940, June 11, 1997 , 273
SCRA 262).
ALTERNATIVE ANSWER
Monsoon rain have been jurisprudentially considered as force
majeure.  It being the cause of the accident, the ship owner should
not be liable. Reconfiguration of the bulk head to accommodate more
passengers per se does not amount to contributory negligence which
will bar the ship owner to claim the defense of force
majeure  provided that it exercised due diligence before, during and
after the incident to prevent loss or injury.
VII
A railroad tract of the Philippine National Railway (PNR) is located
near a busy intersection of Puyat Avenue and Osmeña Highway.
One afternoon, the intersection was heavily congested, as usual.
Juan, the driver of a public utility jeepney (PUJ), drove onto the
railroad tracts but could go no farther because of the heavy traffic as
the intersection. After the jeepney stopped right on the railroad tract,
it was hit and overturned by a PNR train, resulting in the death of
Kim, a passenger of the PUJ, and injuries to Juan and his other
passengers. Juan, the injured passengers and Kim’s family sued the
PNR for damages for its negligence. It was established that the steel
pole barrier before the track was broken, and that the PNR had the
last clear chance of avoiding the accident. On the other hand, the
PNR raised the defense that the track is for the exclusive use of the
train and that motorists are aware that it is negligence per se to stop
their vehicles on the tracks. Decide the case and explain. (5%)
SUGGESTED ANSWER
PNR should be held liable. PNR had the last clear chance of avoiding
the injury but did not exercise the diligence expected of it under the
circumstances.
ALTERNATIVE ANSWER
Since the PUJ was guilty of contributory, negligence, it should be
held solidarily liable with PNR consistent with jurisprudence that the
tortfeasor and the common carrier are solidarily liable in case of
death or injury to passengers of the carrier.
VIII
In 2015, Total Bank (Total) proposed to sell to Royal Bank (Royal) its
banking business for P10 billion consisting of specified assets and
liabilities. The parties reached an eventual agreement, which they
termed as “Purchase and Assumption (P&A) Agreement,” in which
Royal would acquire Total’s specified assets and liabilities, excluding
contingent claims, with the further stipulation that it should be
approved by the Bangko Sentral ng Pilipinas (BSP), BSP imposed
the condition that Total should place in escrow P1 Billion to cover for
contingent claims against it. Total complied. After securing the
approval of the BSP, the two bank signed the agreement. BSP
thereafter issued a circular advising all banks and non-bank
intermediaries that effective January 1, 2016, “the banking activities
of Total Bank and Royal Bank have been consolidated and the latter
has carried out their operations since then.”
(A)  Was there a merger and consolidation of the two banks in point
of the Corporation Code? Explain. (2.5%)
(B) What is meant by a de facto merger? Discuss. (2.5%)
SUGGESTED ANSWER
(A) There was no merger or consolidation of the two banks from the
viewpoint of the Corporation Code. The Supreme Court ruled in B ank
of Commerce v. Radio Philippine Network, Inc. ( G.R. No. 195615,
April 21, 2014), that there can be no merger if the requirements and
procedure for merger were not observed and no certificate of merger
was issued by the SEC.
(B) De facto  merger means that a corporation called the Acquiring
Corporation acquired the assets and liabilities of another corporation
in exchange for equivalent value of shares of stock of the Acquiring
Corporation.
IX
X insured his life for P20 million. X, plays golf and regularly exercises
everyday, hence is considered in good health. He did not know,
however, that his frequent headaches is really caused by his being
hypertensive. In his application for a life insurance for himself, he did
not put a check to the question if he is suffering from hypertension,
believing that because of his active lifestyle, being hypertensive is
remote possibility. While playing golf one day, X collapsed at the
fairway and was declared dead on arrival at the hospital. His death
certificate stated that X suffered a massive heart attack.
A) Will the beneficiary of X be entitled to the proceeds of the life
insurance under the circumstances, despite the non-disclosure that
he is hypertensive at the time of application? (2.5%)
(B) If X died in an accident instead of a heart attack, would the fact of
X’s failure to disclose that he is hypertensive be considered as
material information? (2.5%)
SUGGESTED ANSWER
(A) No, the beneficiary of X is not entitled to the proceeds of the life
insurance. The hypertension of X is a material fact that should have
been disclosed to the insurer. The concealment of such material fact
entitles the insurer to rescind the insurance policy.
ALTERNATIVE ANSWER
(A) X’s beneficiary should be entitled to the proceeds of the life
insurance as there was good faith on the part of the insured for the
non disclosure since the insured was not aware of his hypertension.
SUGGESTED ANSWER
(B) It is still a material information. It is settled that the insured cannot
recover even though the material fact not disclosed is not the cause
of the loss.
X The derivative suit will not prosper, because there was no wrongful
After securing a P1 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 P1 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%)
SUGGESTED ANSWER
E cannot recover from C, the drawee. The forged endorsement of B
did not result in transfer of title in favor of E as no right can be
acquired under such forged endorsement.
ALTERNATIVE ANSWER
The drawee is not liable because it did not accept the instrument.
Under Section 62 of the Negotiable Instruments law, the drawee can
only be liable if he accepts the instrument.
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 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 P175,000.00 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 that 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 P5 million.
The Board represented 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 the lower
price is the best solution to the problem. Decide the suit and explain.
(5%)
SUGGESTED ANSWER
The derivative suit will not prosper, because while it was filed by a
stockholder on behalf of the corporation, the complaint did not allege
the other elements of derivative suit namely; a) exhaustion of intra-
corporate remedies available under the articles of incorporation, by-
laws and rules and regulations governing the corporation to obtain
the relief the stockholder desires; b) it is not a nuisance suit; and c)
appraisal right is not available (Ching v. Subic Bay Golf and Country
Club,  G.R. No. 174353, September 10, 2014).
ALTERNATIVE ANSWER
act on the part of the board of directors. In accordance with the
business judgment rule since the board of directors passed the
resolution in good faith to prevent the foreclosure on the mortgage on
the assets of the corporation, the court cannot review the decision of
the board of directors even if the selling price is less than the market
value of the shares (Montelibano v. Bacolod Murcia Milling Compan y,
G.R. No. L-15092, May 18, 1962).
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%)
SUGGESTED ANSWER
The Corporate Secretary is not justified in declining Y’s request.
Under Section 63 of the Corporation Code, shares of stock covered
by a stock certificate may be transferred by the delivery of the
certificate endorsed by the stockholder-owner or his authorized
representative or other person legally authorized to make the
transfer. The endorsement need not be specifically in favor of the
purchaser.
XIII
C Corp. is the direct holder of 10% of the shareholdings in U Corp., a
non-listed (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%)
SUGGESTED ANSWER
(A)  A Tender Offer Rule means a publicly announced intention by a
person acting alone or in concert with other persons to acquire the
outstanding equity securities of a public company or outstanding
equity securities of an associate or related company of such public
company which controls said public company (Section 19.1.8 of the
SRC implementing Rules and Regulations).
(B) Yes, the mandatory Tender Offer Rule is still applicable even if
the acquisition, direct or indirect, is less than 35% when the purchase
would result in direct or indirect ownership of over 50% of the total
outstanding equity securities of a public company (Cemco Holdings
v. National Life Insurance Company of the Philippines, G.R. No.
171815, August 7,  2007).
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 Sandiganbayam (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%)
SUGGESTED ANSWER
The contention of X is not correct. Deposits in the context of the
Secrecy of Philippine currency deposits include deposits of whatever
nature and kind. They include funds deposited in the bank giving rise
to creditor-debtor relationship, as well as funds invested in the bank
like trust accounts (Ejercito v. Sandiganbayan,  G.R. Nos. 157294-95,
November 30, 2006).
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 P100,000.00 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%)
SUGGESTED ANSWER
Yes, ABC Corporation violated the provisions of the Securities
Regulation Code that prohibits sale of securities to the public, like
promissory notes, without a registration statement filed with and
approved by the Securities and Exchange Commission.
XVI
Henry is a board director in XYZ Corporation. For being the
“fiscalizer” in the Board, the majority of the board directors want him
removed and his shares sold at auction, so he can no longer
participate even in the stockholders’ meetings. Henry approaches
you for advice on whether he can be removed as board director and
stockholder even without cause. What is your advice? Explain
“amotion” and the procedure in removing a director. (5%)
SUGGESTED ANSWER
Henry cannot be removed by his fellow directors. The power to
remove belongs to the stockholders. He can only be removed by the
stockholders representing at least 2/3 of the outstanding capital stock
in a meeting called for that purpose. The removal may be with or
without cause except that in this case, the removal has to be with
cause because it is intended to deprive minority stockholders of the
right of representation. Amotion is the premature ousting of a director
or officer from his post in the corporation.
[NB: The committee recommends that the examinees be given
outright credit for the question on amotion regardless of the answer
as this concept is hardly taken up in law school. It is also requested
that the  examiner be liberal in checking the answers given the
relative difficulty of the questions]
XVII
PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the
amount of P10 million for the purchase of 100 pieces of ecodoors.
Thereafter, a Letter of Credit was obtained by PJ against such loan.
The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap
Metal) in Beijing, China. Upon arrival of 100 pieces of ecodoors, PJ
executed a Trust Receipt in favor of ABC to cover for the value of the
ecodoors for its release to PJ. The terms of the Trust Receipt is that
any proceeds from the sale of the ecodoors will be delivered to ABC
as payment. After the ecodoors were sold, PJ, instead of paying
ABC, used the proceeds of the sale to order from Scrap Metal
another 100 pieces of ecodoors but using another bank to issue a
new Letter of Credit fully covered by such proceeds. PJ refused to
pay the proceeds of the sale of the first set of ecodoors to ABC,
claiming that the ecododors that were delivered were defective. It
then instructed ABC not to negotiate the Letter of Credit that was
issued in favor of Scrap Metal.
(A) Explain what is a “Letter of Credit” as a financial device and a
“Trust Receipt” as a security to the Letter of Credit. (2.5%).’
(B) As counsel of ABC, you are asked for advice on whether or not to
grant the instruction of PJ. What will be you advice? (2.5%)
SUGGESTED ANSWER
(A) A letter of credit is any arrangement howe ver named or described
whereby a bank acting upon the request of its client or on its behalf
agrees to pay another against stipulated documents provided that the
terms of the credit are complied with (Section 2 of the Uniform
Customs and Practices for Documentary Credit).
A trust receipt is an arrangement whereby the issuing bank (referred
to as the entruster under the trust receipt) releases the imported
goods to the importer (referred to as the entrustee) but that the latter
in case of sale must deliver the proceeds thereof to the entruster up
to the extent of the amount owing to the entruster or to return the
goods in case of non-sale.
ALTERNATIVE ANSWER
(A) Under the Code of Commerce, letters of credit are those issued
by one merchant to another for the purpose of attending to a
commercial transaction. The letter of credit should be issued in favor
of a definite person and not to order and be limited to a fixed and
specified amount, or to one or more determined amounts but within a
maximum the … limits of which has to be stated exactly (Articles 567
and 568 of the Code of Commerce).
SUGGESTED ANSWER
(B) I will not grant the instruction of PJ. Under the independence
principle,
the obligation of the bank to pay the Scrap Metal Corporation is not
dependent upon the fulfillment or non-fulfillment of the main contract
underlying the letter of credit but conditioned only on its submission
of the stipulated documents to ABC Bank.
XVIII
B Bank, a large universal bank, regularly extends revolving credit
lines to business establishments under what it terms as socially
responsible banking and private business partnership relations. All
loans that are extended to client have a common “Escalation
Clause,” to wit: “B Bank hereby reserves its right to make successive
increases in interest rates in accordance with the bank’s adopted
policies as approved by the Monetary Board; provided that each
successive increase shall be with the written assent of the depositor.”
(A) X, a regular client of the bank, contends that the “Escalation
Clause” is unfair, unconscionable and contrary to law, morals, public
policy and customs. Rule on the issue and explain. (2.5%)
(B) Suppose that the “Escalation Clause” instead reads: “B Bank
hereby reserves the right to make reasonable increases in interest
rates in accordance with bank policies as approved by the Monetary
Board; Provided, there shall be corresponding reasonable decreases
in interest rates as approved by the Monetary Board.” Would this be
valid? Explain. (2.5%)
SUGGESTED ANSWER
(A) The “escalation clause” is valid because each successive
increase shall be with the written assent of the depositor. This
stipulation does not violate the principle of mutuality of contracts. The
stipulation would have been void if the supposed consent is given
prior to the increase in interest rate.
(B) An escalation clause with a de-escalation clause is valid provided
that the client’s consent is still secured prior to any increase in
interest  rate otherwise, the escalation clause is void.
XIX
In 2015, R Corp., a domestic company that is wholly owned by
Filipinos – files its opposition to the applications for Mineral
Production Sharing Agreements (MPSA) of O Corp., P Corp., and Q
Corp. which were pending before the Panel of Arbitrators (POA) of
the Department of Environmental and Natural Resources (DENR).
The three corporations ” * wanted to undertake exploration and
mining activities in the province of Isabela. The oppositor alleged that
at least 60% of the capital share holdings of the applicants are owned
by B Corp., a 100% Chinese corporation, in violation of Sec. 2, Art.
Xll of the Constitution. The applicants countered that they are
qualified corporations as defined under the Philippine Mining Act of
1995 and the Foreign Investments Act of 1991 since B Corp. holds
only 40% of the capital stocks in each of them and not 60% as
alleged by R Corp.
The summary of Significant Accounting policies statement of B Corp.
reveals that the joint venture agreement of B Corp. with Sigma Corp.
and Delta Corp. involve the O Corp., P Corp., and Q Corp. The
ownership of the layered corporations and joint venture agreements
show that B Corp. practically exercises control over the O, P and Q
corporations contend that the control test should be applied and its
MPSA applicants granted. On the other hand, R Corp, argues that
the “grandfather rule” should be applied. Decide with reasons. (5%)
SUGGESTED ANSWER
The grandfather rule should apply. The Supreme Court held in a
similar case that even though on paper the capital shareholding in a
mining company is 60% owned by Filipinos and 40% by foreigners, if
there is a doubt as to the locus of the beneficial ownership and
control, the grandfather rule should apply. Based on the facts, B
Corporation, a Chinese corporation, practically exercises control over
O, P and Q Corporations. Such circumstance creates a doubt as to
where control and beneficial ownership reside that warrants
application of the grandfather rule (Narra Nickel Mining
and Development Corporation v. Redmont Consolidated
Mines  Corp., G.R. No. 195580, April 21, 2014).
XX
Company X issues a Bank A Check No. 12345 in the amount of
P500,000.00 payable to the Bureau of Internal Revenue (BIR) for the
company’s taxes for the third quarter of 1997. The check was
deposited with Bank B, the collecting bank with which the BIR has an
account. The check was subsequently cleared and the amount of
P500,000.00 was deducted from the company’s balance. Thereafter,
Company X was notified by the BIR of its non-payment of its unpaid
taxes despite the P500,000.00 debit from its account. This prompted
the company to seek assistance from the proper authorities to
investigate on the matter.
The results of the investigation disclosed that unknown then to
Company X, its chief accountant Bonifacio Santos is part of a
syndicate that devised a scheme to siphon its funds. It was
discovered that though deposited, the check was never paid to the
BIR but was passed on by Santos to Winston Reyes, Banks B’s
branch manager and Santos’ co-conspirator. Instead of bringing the
check to the clearing house, Reyes replaced Check No. 12345 with a
worthless check bearing the same amount, and tempered documents
to cover his tracks. No amount was then credited to the BIR.
Meanwhile, check No. 12345 was subsequently cleared and the
amount therein credited into the account of fictitious persons, to be
later withdrawn by Santos and Reyes.
Company X then sued Bank B for the amount of P500,000.00
representing the amount deducted from its account. Bank B
interposed the defense that Company X was guilty of contributory
negligence since its confidential employee Santos was an integral
part of the scheme to divert the proceeds of Check No. 12345. Is
Company X entitled to reimbursement from Bank B, the collecting
bank? Explain. (5%)
SUGGESTED ANSWER
Yes, Company X is entitled to reimbursement from the collecting
bank. – In a similar case, the Supreme Court ruled that the drawer
could recover the amount deducted from its account because it failed
to ensure that the check be paid to the designated payee, while the
collecting bank should share 1/2 of the loss because its branch
manager conspired in the fraud (Philippine Commercial International
Bank  v. Court of Appeals,  G.R. No. 121413, January 29, 2001, 350
SCRA 446).
[1] WHAT IS A CORPORATION?
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
[2] WHAT ARE A CORPORATION'S ATTRIBUTES?
If referring to the attribute of a corporation based on its definition,
they are the following: [a] artificial being; [b] created by operation of
law; [c] having the right of succession; and [d] with express, implied
and inherent powers.
If referring to the characteristics of corporations in general, they are
the following:
[a] Continuity of existence;
[b] Limited investor or shareholder's liability;
[c] Separate juridical personality;
[d] Capacity to sue and be sued;
[e] Capacity to incur obligations and acquire rights;
[f] Centralized management via the governing board;
[g] Immunity from collateral attack; and
[h] others.
[3] WHAT IS THE GRANDFATHER RULE?
The Grandfather Rule is a stricter or more stringent test than the
control test when it comes to determining compliance with the
minimum Filipino equity requirement among corporations. The
Grandfather Rule determines the actual Filipino ownership and
control in a corporation by tracing both the direct and indirect
shareholdings in the corporation.
In other words, if the shares of stock of the immediate investor
corporation is in turn held and controlled by another corporation, then
we must look into the citizenship of the individual stockholders of the
latter corporation. In other words, if there are layers of intervening
corporations investing in a Filipinized venture, we must delve into the
citizenship of the individual stockholders of each corporation.
[4] EXPLAIN THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY?
As a rule, a corporation has a personality distinct from its
stockholders, and is not affected by the personal rights, obligations
and transactions of the latter. This general rule also applies between
a parent company and subsidiary. However, the veil of corporate
fiction may be pierced when it is used as a shield to further an end
subversive of justice, or for purposes that could not have been
intended by law that created it or to defeat public convenience, justify
wrong, protect fraud or defend crime or to perpetuate fraud or
confuse legitimate issues or to circumvent the law or perpetuate
deception or as an alter ego, adjunct or business conduit for the sole
benefit of the stockholders.
[5] WHAT ARE THE OBLIGATIONS OF DIRECTORS AND
OFFICERS OF A CORPORATION?
In general, directors and officers are bound by the trust fund doctrine
which states that the governing officers of the corporation hold in
trust the funds of the corporation in trust for the benefit of the
stockholders. Hence, specifically, directors and officers have the
obligation to maintain loyalty, obedience and  diligence to the
corporation.
According to the Corporation Code, directors and trustees shall be
jointly and severally liable for all damages suffered by the
corporation, shareholders or third persons as a result of gross
negligence or bad faith in directing the affairs of the corporation or as
a result of personal or pecuniary conflict of interest with their duties
as directors or trusties.
If a director, trustee or officer attempts to acquire or acquires any
interest adverse to the corporation's interest, in violation of his duty or
when equity disallows him to deal with himself, he shall be liable as
trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
[7] WHAT ARE THE CIRCUMSTANCES THAT MAY BE
CONSIDERED TO JUSTIFY THE APPLICATION OF THE
DOCTRINE TO MAKE THE PARENT CORPORATION LIABLE FOR
THE OBLIGATIONS OF ITS SUBSIDIARY?
According to Garrett vs. Southern Railway, there are 11 factors:
[a] STOCK. The parent corporation owns all or most of the capital
stock of the subsidiary;
[b] DIRECTORS. The parent and subsidiary have common directors
and officers;
[c] FINANCE. The parent finances the subsidiary;
[d] SUBSCRIPTION OR INCORPORATION. The parent subscribes
to all the capital stock of the subsidiary or otherwise causes its
incorporation;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has grossly
inadequate capital;
[f] EXPENSES AND LOSSES. The parent pays the salaries and
other expenses or losses of the subsidiary;
[g] NO OTHER BUSINESS. The subsidiary has substantially no
business except with the parent corporation or no assets except
those conveyed to or by the parent corporation;
[h] DEPARTMENT OR DIVISION. In the papers of the parent
corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation or its
business or financial responsibility is referred as the parent’s own;
[i] PROPERTY. The parent corporation uses the property of the
subsidiary as its own;
[j] DEPENDENCE. The directors or the executives of the subsidiary
do not act independently in the interest of the subsidiary but take
their orders from the parent corporation in the latter’s interest; and
[k] LEGAL REQUIREMENTS. The formal legal requirements of the
subsidiary are not observed.
[7] IS OWNERSHIP OF SUBSTANTIAL PORTION OF THE
OUTSTANDING CAPITAL IN A CORPORATION ENOUGH
JUSTIFICATION TO APPLY THE DOCTRINE?
In corporation law, right of succession also means "continuity of
existence." This means that, despite the death, incapacity,
replacement or civil interdiction of the persons composing it, the
corporation is not affected and its business operations continue
uninterrupted as long as its juridical personality exists.
[10] DISTINGUISH THE FOLLOWING:
A. DE JURE CORPORATION VS. DE FACTO CORPORATION
A de facto corporation is a defectively organized corporation, which
has all the powers and liabilities of a de jure corporation and, except
as to the State, has a juridical personality distinct and separate from
its shareholders, provided that the following requisites are
concurrently present:

No, ownership of substantial portion of the outstanding capital in a [a] That there is an apparently valid statute under which the
corporation is no enough justification to apply the doctrine of piercing corporation with its purposes may be formed;
of the corporate veil. [b] That there has been colorable compliance with the legal
requirements in good faith; and
The veil of corporate fiction may be pierced when it is used as a [c] That there has been use of corporate powers, i.e., the transaction
shield to further an end subversive of justice, or for purposes that of business in some way as if it were a corporation.
could not have been intended by law that created it or to defeat
public convenience, justify wrong, protect fraud or defend crime or to A corporation which has no defect in legal requirements is a de jure
perpetuate fraud or confuse legitimate issues or to circumvent the corporation.
law or perpetuate deception or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders. Therefore, there are B. STOCK CORPORATION VS. NON-STOCK
limited circumstances in which said doctrine applies:
A stock corporation is one whose capital stock is divided into shares
[a] Injustice; and whose articles of incorporation allows it to distribute dividends. A
[b] Public inconvenience; non-stock corporation is one which lacks either of the two
[c] Wrong; requirements of a stock corporation.
[d] Fraud;
[e] Crime; C. CORPORATION VS. PARTNERSHIP
[f] Confusion regarding legitimate issues; and (among others)
[g] Deception through alter ego, adjunct or business conduit. A corporation is different from a partnership in the following ways:

8. WHAT ARE THE ELEMENTS THAT MUST BE PRESENT TO
JUSTIFY THE PIERCING OF THE VEIL OF CORPORATE FICTION
ON THE GROUND THAT THE CORPORATION IS A MERE ALTER
EGO?
According to Garrett vs. Southern Railway, there are 11 factors:
[a] STOCK. The parent corporation owns all or most of the capital
stock of the subsidiary;
[b] DIRECTORS. The parent and subsidiary have common directors
and officers;
[c] FINANCE. The parent finances the subsidiary;
[d] SUBSCRIPTION OR INCORPORATION. The parent subscribes
to all the capital stock of the subsidiary or otherwise causes its
incorporation;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has grossly
inadequate capital;
[f] EXPENSES AND LOSSES. The parent pays the salaries and
other expenses or losses of the subsidiary;
[g] NO OTHER BUSINESS. The subsidiary has substantially no
business except with the parent corporation or no assets except
those conveyed to or by the parent corporation;
[h] DEPARTMENT OR DIVISION. In the papers of the parent
corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation or its
business or financial responsibility is referred as the parent’s own;
[i] PROPERTY. The parent corporation uses the property of the
subsidiary as its own;
[j] DEPENDENCE. The directors or the executives of the subsidiary
do not act independently in the interest of the subsidiary but take
their orders from the parent corporation in the latter’s interest; and
[k] LEGAL REQUIREMENTS. The formal legal requirements of the
subsidiary are not observed.
[9] EXPLAIN THE RIGHT OF SUCCESSION.
[a] A corporation is created by law or by operation of law while a
partnership is created by mere agreement of the parties;
[b] A corporation is governed primarily by the Corporation Code while
a partnership, the Civil Code;
[c] A corporation can only exercise powers which are expressly
granted by law or those inherent or implied while a partnership can
act freely as long as not contrary to law, morals, good customs,
public order and public policy; and
[d] A corporation acts through a board while a partnership acts
through any partner, except when a general partner has been
appointed.
[11] A CORPORATION WAS CREATED BY A SPECIAL LAW.
LATER, THE LAW CREATING IT WAS DECLARED INVALID. MAY
SUCH CORPORATION CLAIM TO BE A DE FACTO
CORPORATION?
No, such a corporation created by an invalid special law cannot claim
to be a de facto corporation for two reasons.
First, an invalid law creates no office, confers no rights and imposes
no obligation. It is not a source of anything because it is void.
Second, for there to be a de facto corporation, there must be an
apparently valid statute under which the corporation with its purposes
may be formed.
[12] MAMUHUNAN WAS INVITED BY HIS FRIENDS TO INVEST IN
A CORP., A NEWLY ORGANIZED FIRM ENGAGED IN MONEY
MARKET FINANCING OPERATION. BECAUSE OF HIS HEAVY
INVESTMENTS, MAMUHUNAN BECAME THE FIRM’S PRESIDENT
AND, AS SUCH, PURCHASED A BIG NUMBER OF COMPUTERS,
TYPEWRITERS AND OTHER EQUIPMENT FROM TAKTAK CORP.
ON INSTALLMENT BASIS. A CORP. PAID THE DOWN PAYMENT
AND TAKTAK CORP. ISSUED THE CORRESPONDING RECEIPT.
TO HIS CHAGRIN, MAMUHUNAN DISCOVERED THAT THE
ARTICLES OF INCORPORATION HAD NOT BEEN FILED BY HIS
FRIENDS ON THAT DATE SO HE HURRIEDLY ATTENDED TO
THE MATTER. NO SOONER HAD THE CERTIFICATE OF into by a promoter are called pre-incorporation subscriptions.
INCORPORATION BEEN ISSUED BY THE SEC, A CORP.
BECAME BANKRUPT AFTER THREE MONTHS. UPON BEING [14] CAN ALL THE STOCKHOLDERS IN A CORPORATION BE
SUED BY TAKTAK CORP. IN HIS PERSONAL CAPACITY, FOREIGNERS?
MAMUHUNAN RAISED AMONG ITS DEFENSES THE DOCTRINES
OF DE FACTO CORPORATIONS AND CORPORATIONS BY Yes, as long as the corporation is not engaged in a nationalized
ESTOPPEL. CAN THE TWO DEFENSES BE VALIDLY RAISED? business, all its stockholders can be foreigners.

As to the defense of de facto corporation, no, it cannot be validly [15] WHAT ARE THE FULLY OR PARTLY NATIONALIZED
raised because one requisite is that there must be a colorable CORPORATIONS?
compliance with the legal requirement. In short, there must be a
certificate of registration issued by the proper government agency Based on the Constitution and statutes such as the Anti-Dummy Law,
which, in this case, is the Securities and Exchange Commission. the following are nationalized corporations:

If used to implead his friends, the defense of corporation by estoppel [a] Banking institutions;
can be validly raised. [b] Finance institutions;
[c] Public utilities;
Under the Corporation Code, the doctrine of corporation by estoppel [d] Those engaged in the disposition, development and utilization of
is a device to protect persons dealing with an ostensible corporation. natural resources;
"All persons who assume to act as a corporation knowing it to be [e] Fishing companies;
without authority to do so shall be liable as general partners for all [f] Shipping companies;
debts, liabilities and damages incurred or arising as a result thereof." [g] Construction companies;
[h] Those dealing with geothermal energy;
Therefore, in the case of Mamuhunan, he can use this doctrine to [i] Retail companies;
bring to the suit and make liable his friends who invited him to invest [j] Mass media;
and made him believe that the corporation exists. [k] Advertising;
[l] Educational institutions;
However, if Mamuhunan intends to use this defense to defeat the [m] Those engaged in the rice and corn industries;
valid claims of TAKTAK, it cannot be validly raised. According to the [n] Those engaged in the tax-free cottage industry; and
Corporation Code, when any such ostensible corporation is sued on [o] Those dealing with atomic energy.
any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense [16] WHAT INDUSTRIES ARE NOT ALLOWED TO HAVE FOREIGN
its lack of corporate personality. On who assumes an obligation to an STOCKHOLDERS?
ostensible corporation as such, cannot resist performance thereof on
the ground that there was in fact no corporation. As discussed above, under the Constitution and statutes, there are
nationalized industries. Partly nationalized ones can have foreign
[13] EXPLAIN WHO THE FOLLOWING ARE: stockholders as long as the minimum Filipino equity requirement is
complied with. In case of fully nationalized industries, corporations
A. INCORPORATORS engaged therein are not allowed to have any foreign stockholder.

Incorporators are those stockholders or members mentioned in the Examples of fully nationalized/Filipinized industries are: [a] rural
articles of incorporation as originally forming and composing the banks; [b] cooperative fish farming; [c] use of marine resources; [d]
corporation and who are signatories thereof. retail trade; [e] mass media; and [f] rice and cord industry.

B. CORPORATORS [17] WHAT CORPORATE NAME CANNOT BE USED?

Corporators are those who compose a corporation, whether as No corporate name may be allowed by the SEC if the proposed
stockholders or as members. name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or
C. STOCKHOLDERS AND MEMBERS is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
Broadly, a stockholder or member is a person who has interest in a issue an amended certificate of incorporation under the amended
corporation by reason of his investment therein. A stockholder is an name. In short, the following are not allowed:
investor in a stock corporation while a member is an investor in a
non-stock corporation. [a] Identical names;
[b] Deceptively similar names;
D. DIRECTORS AND TRUSTEES [c] Confusingly similar names;
[d] Names protected by law;
Directors and trustees are persons who compose the governing [e] Patently deceptive names;
board of a corporation. Directors are members of the governing [f] Confusing names; and
board of a stock corporation while trustees, non-stock corporation. [g] Illegal names.

E. CORPORATE OFFICERS 18. WHAT IS THE IMPORTANCE/SIGNIFICANCE OF THE

Corporate officers are special agents of the corporation as provided
in its by-laws. According to the Corporation Code, there shall be an
election of corporate officers such as the president, who shall be a
director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws.
F. PROMOTER
PRINCIPAL PLACE OF BUSINESS STATED IN THE ARTICLES OF
INCORPORATION?
The statement regarding an exact principal place of business in the
AOI is important because it is this address to which all summons,
papers and other legal processes can be sent.
19. WHAT IS THE MAXIMUM TERM OF A CORPORATION? CAN
IT BE EXTENDED?

A promoter is a person who invites investors and subscribers before Under the Revised Corporation Code, the maximum term of
the formation and organization of a corporation. Contracts entered corporate existence has been removed. The Philippines now adopts
the doctrine of perpetual corporate existence. [a] REPORT. Failure to file its annual report or pay any fees as
required by this Code;
20. DETERMINE THE FOLLOWING TERMS: [b] RESIDENT AGENT. Failure to appoint and maintain a resident
agent in the Philippines as required by this Title;
A. AUTHORIZED CAPITAL STOCK [c] CHANGES. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange Commission a
This is the maximum capital of the corporation as reflected on its statement of such change as required by this Title;
articles of incorporation as approved by the SEC. [d] AUTHENTICATION. Failure to submit to the Securities and
Exchange Commission an authenticated copy of any amendment to
B. SUBSCRIBED CAPITAL STOCK its articles of incorporation or by-laws or of any articles of merger or
consolidation within the time prescribed by this Title;
This is part of the authorized capital or the whole of it over which [e] MISREPRESENTATION. A misrepresentation of any material
there have been contracts of subscription. In other words, there has matter in any application, report, affidavit or other document
been a promise to pay and purchase said stocks and, as a result of submitted by such corporation pursuant to this Title;
such contract, a stockholder holds the stocks. According to the [f] FAILURE TO PAY TAXES. Failure to pay any and all taxes,
Corporation Code, at least 25% of the capital stock must be imposts, assessments or penalties, if any, lawfully due to the
subscribed. Philippine Government or any of its agencies or political subdivisions;
[g] OUTSIDE PURPOSE. Transacting business in the Philippines
C. PAID-UP CAPITAL outside of the purpose or purposes for which such corporation is
authorized under its license;
This is part of the authorized capital stock or the whole of it which has [h] UNLICENSED FOREIGN CORPORATION. Transacting business
not only been subscribed but also paid. According to the Corporation in the Philippines as agent of or acting for and in behalf of any foreign
Code, the paid-up capital must be at least 25% of the subscribed corporation or entity not duly licensed to do business in the
capital. Philippines; or
[i] OTHER GROUNDS. Any other ground as would render it unfit to
D. OUTSTANDING CAPITAL transact business in the Philippines. (n)

Outstanding capital is that part of the authorized capital which has [24] WHAT IS A BY-LAW AND IT’S VALID REQUISITES?
been issued as shares to stockholders.
A by-laws is the internal rules of the corporation. It is the list of
E. CAPITAL. policies for the corporation's internal business. The requisites for its
validity are:
Capital is the maximum fund that the corporation intends to use in its
operations. If reflected on the articles of incorporation and approved [a] It must not be contrary to law, public policy or morals;
by the SEC, it is called "authorized capital stock." [b] It must not be inconsistent with the articles of incorporation;
[c] It must be general and uniform in its effect or applicable to all alike
[21] THE ARTICLES OF INCORPORATION TO BE REGISTERED or those similarly situated;
IN THE SEC CONTAINED THE FOLLOWING PROVISIONS [d] It must not impair the obligations of contracts or vested rights; and
[c] It must be reasonable.
 A) “FIRST ARTICLE. THE NAME OF THE CORPORATION SHALL
BE TOHO MARKETING COMPANY.” B) “THIRD ARTICLE. THE [25] WHAT IS THE BINDING EFFECT OF THE PROVISIONS OF
PRINCIPAL OFFICE OF THE CORPORATION SHALL BE THE BY-LAWS?
LOCATED IN REGION III, IN SUCH MUNICIPALITY THEREIN AS
ITS BOARD OF DIRECTORS MAY DESIGNATE.” C) “SEVENTH By-laws become effective and binding only upon approval of the
ARTICLE. THE CAPITAL STOCK OF THE CORPORATION IS ONE Securities and Exchange Commission (SEC). Also, all the elements
MILLION PESOS (P1,000,000.00), PHILIPPINE CURRENCY.” for its validity must be present; otherwise, it cannot bind anyone.
WHAT ARE YOUR COMMENTS AND SUGGESTED CHANGES TO
THE PROPOSED ARTICLES? It must be noted, however, that by-laws are mere internal rules and
are subordinate to the articles of incorporation.
First, the corporate name already exists. It should be changed.
[26] WHAT ARE THE KINDS OF POWERS OF A CORPORATION?
Second, the principal place of business or principal office should be
more specific. According to the implementing rules and regulations of In the broad sense, a corporation has the following powers:
the SEC, the principal office should be an exact address.
[a] Those expressly granted or authorized by law and its charter or
[22] HOW CAN THE ARTICLES OF INCORPORATION BE articles of incorporation;
AMENDED? [b] Those impliedly granted or authorized by law as are reasonable
necessary to carry out its express powers; and
There must be [a] a resolution by the governing board via a majority [c] Those incidental to its existence.
vote of its members; [b] 2/3 vote or written assent of the stockholders
representing the outstanding capital stock; [c] submission to and filing In the narrow sense, a corporation has the following express powers
with the SEC; [d] a copy of the amendments duly certified under oath (those expressly granted by law):
by the corporate secretary and a majority of the directors or trustees
stating that the vote requirements have been complied with; and [e] [a] Power to extend or shorten its corporate term;
favorable recommendation by the appropriate supervising [b] Power to increase or decrease its capital stock;
government agency. [c] Power to incur, create or increase bonded indebtedness;
[d] Power to deny pre-emptive rights;
[23] WHEN CAN SEC SUSPEND OR CANCEL CERTIFICATE OF [e] Power to sell or dispose of corporate assets;
REGISTRATION? [f] Power to acquire own shares;
[g] Power to invest corporate funds in another corporation or
Without prejudice to other grounds provided by special laws, the business or for any other purpose;
license of a foreign corporation to transact business in the Philippines [h] Power to declare dividends; and
may be revoked or suspended by the Securities and Exchange [i] Power to enter into management contracts.
Commission upon any of the following grounds:
[27] WHAT IS AN ULTRA VIRES ACT?
 [c] To pay dissenting or withdrawing stockholders entitled to payment
An ultra vires act is one done by the corporation outside of its for their shares under the provisions of the Corporation Code.
purpose. In other words, it is an act not supported by the purpose
clause in the articles of corporation. [32] CAN THE BOARD BE COMPELLED TO DECLARE DIVIDENDS
EVERY YEAR?
28. WHO MAY EXERCISE THE POWERS OF THE
CORPORATION? As a general rule, the declaration of dividends is a business judgment
which is lodged in the governing board. By way of exception, the
The powers of a corporation are exercised by the governing board. articles of incorporation may provide that such declaration is required
every year.
In case of stock corporations, it is the board of directors. In non-stock
corporations, it is the board of trustees. It may also happen that the corporation's unrestricted retained
earnings would exceed 100% of its paid-in capital stock every year.
[29] IAI INC. (IAI) BY A STOCK PURCHASE AGREEMENT SOLD In such a case, each year this happens, the board may be compelled
TO AI INC (AI) FOR THE SUM OF P19.5M ALL ITS OUTSTANDING to so declared except:
SHARES OF STOCKS IN “F” CORP. THE AGREEMENT WAS
SIGNED BY LG AND JV, PRESIDENTS OF IAI AND AI [a] When justified by definite corporate expansion projects or
RESPECTIVELY. IAI EXPRESSLY WARRANTED IN THE programs approved by the board of directors; or
AGREEMENT THAT THE NETWORTH OF “F” CORP. IS P12M. IAI [b] When the corporation is prohibited under any loan agreement with
AGREED THAT IF THE NETWORTH IS LESS THAN P12M, IAI any financial institution or creditor, whether local or foreign, from
WILL PAY AI THE DEFICIENCY. AI PAID IAI P12M AND RETAINED declaring dividends without its/his consent, and such consent has not
THE AMOUNT OF P7.5M TO ANSWER FOR ANY DEFICIENCY IN yet been secured; or
THE NET WORTH. INSTEAD OF REFLECTING A NET WORTH, IT [c] When it can be clearly shown that such retention is necessary
TURNED OUT THAT “F” HAD A DEFICIENCY OF P1.2M. HENCE, under special circumstances obtaining in the corporation, such as
IAI IS OBLIGATED TO REIMBURSE AI THE AMOUNT OF P13.2M when there is need for special reserve for probable contingencies
(P12M PLUS THE DEFICIENCY OF P1.2M). HOWEVER,
CONSIDERING THAT AI RETAINED P7.5M, THE BALANCE TO BE [33] WHAT IS THE TRUST FUND DOCTRINE?
REIMBURSED IS ONLY P5.2M. LATER, LG, THE PRESIDENT OF
IAI PROPOSED IN WRITING THAT AI’S CLAIM FOR REFUND BE Trust fund doctrine is a principle of judicial invention which says that
REDUCED TO P4.09M BUT HE PROMISED TO PAY THE COSTS corporate assets are held as a trust fund for the benefit of
OF CERTAIN SUPERSTRUCTURES IN BEHALF OF AI. AI shareholders and creditors and that the corporate officers have a
ACCEPTED THE PROPOSAL. LATER IAI’S BOARD REFUSED TO fiduciary duty to deal with them properly.
IMPLEMENT THE ACCEPTED PROPOSAL ON THE GROUND
THAT WHILE THE BOARD AUTHORIZED LG TO PURCHASE THE [34] WHAT CAN BE INCLUDED IN UNRESTRICTED RETAINED
SHARES, IT DID NOT AUTHORIZE LG TO MAKE THE LAST EARNING?
PROPOSAL. IS THE POSITION OF IAI’S BOARD TENABLE?
In a nutshell, unrestricted retained earnings are surplus profits which
[30] IN WHAT INSTANCES IS CONCURRENCE OF THE have not yet been earmarked for a project or transaction. More
STOCKHOLDERS NECESSARY FOR THE EXERCISE OF THE specifically, they are earnings which have not been allocated for any
POWERS OF THE CORPORATIONS? managerial, contractual or legal purpose and which are free for
distribution to stockholders as dividends.
[a]Section 16. Amendment of Articles of Incorporation
[b]Section 28. Removal of directors or trustees [35] WHAT ITEMS CANNOT BE USED FOR DIVIDEND
[c]Ratification under Section 32. Dealings of directors, trustees or DISTRIBUTION?
officers with the corporation
[d]Ratification under Section 34. Disloyalty of a director Broadly, the following items cannot be used for dividend distribution:
[e]Section 37. Power to extend or shorten corporate term
[f]Sale of all or substantially all under Section 40. Sale or other [a] Earnings allocated for managerial purposes;
disposition of assets [b] Earnings allocated for contractual purposes; and
[g]Section 42. Power to invest corporate funds in another corporation [c] Earnings allocated for legal purposes.
or business or for any other purpose
[h]Merger or acquisition under Section 77. Stockholder’s or member’s Specifically, the dividends cannot be distributed from the
approval corporation's capital. It should be from actual and bona fide earnings.
[i]Dissolution of the corporation under Section 118. Voluntary Revaluation surplus, reduction surplus and treasury shares also
dissolution where no creditors are affected and Section 119. cannot be used as items for dividend distribution.
Voluntary dissolution where creditors are affected
[j]Deletion or removal of any provision in the articles or changes in In addition to this, considerations received from the issuance of no-
the quorum or voting requirements among close corporations par value shares form part of the capital and cannot be distributed as
under Section 103. Amendment of articles of incorporation dividends.
[k] Section 43. Power to declare dividends (in case of stock
dividends) [36] CAN GAIN FROM SALE OF REAL PROPERTY BE
CONSIDERED PART OF UNRESTRICTED RETAINED
[31] WHAT ARE THE INSTANCES WHEN CORPORATION MAY EARNINGS?
ACQUIRE ITS OWN SHARES?
Yes.
A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including [37] CAN TREASURY SHARES BE DISTRIBUTED BY WAY OF
but not limited to the following cases: Provided, That the corporation DIVIDENDS?
has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired: Yes.

[a] To eliminate fractional shares arising out of stock dividends; [38] WHAT ARE THE REQUISITES OF A SALE OF ALL OR
[b] To collect or compromise an indebtedness to the corporation, SUBSTANTIALLY ALL PROPERTIES?
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and The following requisites of a sale of all or substantially all properties:

[a] Resolution by the majority vote of a governing board;
[b] Authorization from the stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of members;
[c] Such ratification of stockholders or members must be made at a
meeting duly called for that purpose;
[d] Prior written notice of the proposed action and of the time and
place of meeting addressed to all stockholders of record, either by
mail or personal service;
[e] The sale of assets must not be illegal such as an illegal
combination or monopoly;
[f] Any dissenting stockholder shall have the option to exercise his
appraisal right.
[39] X CORPORATION IS ENGAGED IN SELLING PENCILS ON
WHOLESALE BASIS. IT IS MERELY RENTING A BODEGA AND
90% OF ITS ASSETS CONSISTS OF ITS STOCKS OF PENCIL. “A”,
A SCHOOL SUPPLY DEALER, PURCHASED ALL THE STOCKS
OF X CORP. IS THE TRANSACTION A SALE OF SUBSTANTIALLY
ALL OF THE ASSETS OF THE CORPORATION REQUIRING
CONCURRENCE OF STOCKHOLDERS REPRESENTING 2/3 OF
THE OUTSTANDING CAPITAL STOCK?
No, because this sale is in the regular course of business. Moreover,
this is in line with the purpose of the corporation.
[40] AA CORPORATION IS ENGAGED IN THE BUSINESS OF
PRINTING BOOKS. AROUND 70% OF ITS ASSETS CONSISTS OF
CASH IN THE BANK, 25% PRINTING MACHINE AND THE
REMAINING OFFICE EQUIPMENT AND SUPPLIES. AA
CORPORATION PLANS TO SELL THE MACHINE. CAN IT BE
CONSIDERED SALE OF SUBSTANTIALLY ALL OF THE ASSETS
OF THE CORPORATION?
Yes, because the normal operations of the company would be
impaired by such sale. Sale of substantially all assets of the
corporation has been defined as that which will render it "incapable of
continuing the business or accomplishing the purpose for which it is
incorporated. The test is not quantity but quality.
[41] WHAT ARE THE WAYS OF INCREASING AND DECREASING
THE CAPITAL STOCK?
The following are three ways of doing this:
[a] Increasing the par value of existing shares without increasing the
number of shares;
[b] Increasing the number of existing shares without increasing the
par value thereof; and
[c] Increasing the number of existing shares and, at the same time,
increasing the par value thereof.
42. WHAT ARE THE QUALIFICATIONS OF DIRECTORS?
[a] He must have at least one (1) share which stands in his name on
the books of the corporation; and
[b] He must be a natural person.
Also:
[c] He must not have been convicted by final judgment for a crime
punishable by at least 6 years of imprisonment;
[d] He must not have violated the Corporation Code within 5 years
prior to the date of his election; and
[e] He must be of legal age.
43. WHAT IS THE BUSINESS JUDGEMENT RULE?
Courts will not interfere with the decisions made by the governing
board as regards the internal affairs of the corporation unless such
acts are so unconscionable and oppressive as to amount to a wanton
destruction of the rights of the minority shareholders, let alone illegal.
44. WHAT IS THE DOCTRINE OF CORPORATE OPPORTUNITY?
Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby
obtaining profits to the prejudice of such corporation: A director shall
refund to the corporation all the profits he realizes on a business
opportunity which: [a] the corporation is financially able to undertake;
[b] from its nature, is in line with corporation's business and is of
practical advantage to it; and [ c] the corporation has an interest or a
reasonable expectancy.
45. WHO IS AN INTERLOCKING DIRECTOR?
Interlocking directors are those whose interests in two (or more)
companies are both (all) substantial. Substantial interest means more
than 20% of the outstanding capital stock.
46. ARE CORPORATE AGENTS SUCH AS DIRECTORS,
TRUSTEES OR OFFICERS OF A CORPORATION SOLIDARILY
LIABLE WITH THE CORPORATION THEY REPRESENT?
Generally, corporate agents are not solidarily liable with the
corporation because of the doctrine of separate corporate
personality.
It is hornbook principle that personal liability of corporate directors,
trustees or officers attaches only when: [a] they assent to a
patently unlawful act of the corporation, or when they are guilty
of bad faith or gross negligence in directing its affairs, or when there
is a conflict of interest resulting in damages to the corporation, its
stockholders or other persons; [b] they consent to the issuance
of watered down stocks or when, having knowledge of such
issuance, do not forthwith file with the corporate secretary their
written objection; [c] they agree to hold themselves personally and
solidarily liable with the corporation; or [d] they are made by specific
provision of law personally answerable for their corporate action.
47. ANSWER THE FOLLOWING:
A. WHO ARE SELF-DEALING
DIRECTORS/TRUSTEES/OFFICERS?
Self-dealing corporate agents are those [a] who have pecuniary
interest in the a transaction or contract that the corporation is
entering into and [b] whose affirmative vote is material to the
realization or approval of such transaction, contract or project.
B. WHAT ARE THE RULES WHEN THERE IS A SELF-DEALING
DIRECTOR/TRUSTEE/OFFICER IN A CORPORATION?
A contract of the corporation with one or more of its directors or
trustees is VOIDABLE, at the option of such corporation.
Such contract is VALID if all of the following conditions are present:
[a] That the presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to constitute a
quorum for such meeting;
[b] That the vote of such director or trustee was not necessary for the
approval of the contract;
[c] That the contract is fair and reasonable under the circumstances;
and
[d] That in case of an officer, the contract has been previously
authorized by the BOD.
In the absence of the [a] and [b] above, there may be ratification by
stockholders representing at least 2/3 of the outstanding capital
stock or at least 2/3 of the members in a meeting called for the
purpose voted to ratify the contract after full disclosure of such
adverse interest in said meeting.
48. WHO ARE THE CORPORATE OFFICERS OF A
CORPORATION?
They are those officers identified by the Corporation Code, by the
articles of incorporation or by the by-laws of the corporation.
Currently, the Revised Corporation Code provides that they are the
CEO, CFO, the corporate secretary and other officers as may be
provided in the by-laws.
49. IS SERVICE OF SUMMONS ON A SECRETARY OF THE
PRESIDENT OF A DOMESTIC PRIVATE CORPORATION BINDING
ON THE CORPORATION?
No, because the Rules of Court requires that such service shall be
made exclusively to the President, the Managing Director, the
Corporate Secretary, the in-house counsel, the Treasurer or the
General Manager.
50. “A”, AS OWNER OF A CERTAIN NUMBER OF SHARES OF
STOCK IN X CORPORATION, ENTERED INTO A VOTING TRUST
AGREEMENT WITH B. ON THE BASIS OF THE VOTING TRUST
AGREEMENT, B ANNOUNCED HIS DESIRE TO RUN FOR A SEAT
IN THE BOARD OF DIRECTORS OF X CORPORATION. C,
ANOTHER STOCKHOLDER, OBJECTED AND QUESTIONED THE
ELIGIBILITY OF B TO BE A DIRECTOR OF X CORPORATION. IS
C’S CONTENTION CORRECT? WHY?
A voting trust agreement results in the separation of the voting rights
of a stockholder from his other rights such as the right to receive
dividends and other rights to which a stockholder may be entitled
until the liquidation of the corporation. It is the trustee of the shares
who acquires legal title to the shares under the voting trust
agreement and thus entitled to the right to vote and the right to be
elected as board of directors while the trustor‐stockholder has the
beneficial title which includes the right to receive dividends (Lee vs.
CA 205 SCRA 752)
51. WHO CAN APPOINT AND REMOVE THE OFFICERS OF THE
CORPORATION?
The stockholders have the power to remove directors of the
corporation. The power to remove belongs to the stockholders
exclusively. The appointment of directors/trustees is done by election
also by the stockholders/members.
After the election of directors, they (the directors) must formally
organize for the election of corporate officers.
52. FLAD CORPORATION WAS ORIGINALLY WITH AN
AUTHORIZED CAPITAL STOCK OF P500,000.00 SHARES WITH
THE MEMBERS OF THE “T” FAMILY OWNING P450,200.00
SHARES REPRESENTING THE OUTSTANDING CAPITAL. THE “T”
FAMILY INVITED MEMBERS OF THE “O” FAMILY TO INVEST IN
FLADC AS STOCKHOLDERS NECESSITATING AN INCREASE OF
THE AUTHORIZED CAPITAL STOCK TO GIVE EACH GROUP
EQUAL(50-50) SHAREHOLDINGS AS AGREED UPON IN THE
PRE-SUBSCRIPTION AGREEMENT. PURSUANT TO THE SAID
SUBSCRIPTION AGREEMENT, THE AUTHORIZED CAPITAL
STOCK WAS THUS INCREASED FROM P500,000.00 SHARES TO
P2,000,000.00 SHARES WITH A PAR VALUE OF P100.00 EACH,
WITH THE “O” FAMILY SUBSCRIBING TO P1,000,000.00 SHARES
AND THE “T” TO P549,800.00 MORE SHARES IN ADDITION TO
THEIR P450,200.00 SHARES TO COMPLETE P1,000,000.00
SHARES. THE PRE-SUBSCRIPTION AGREEMENT LIKEWISE
PROVIDES THAT THE “T” FAMILY SHALL NOMINATE THE VICE-
PRESIDENT AND TREASURER AND FIVE DIRECTORS WHILE
THE “O” FAMILY IS SUPPOSED TO MANAGE THE MALL OWNED
BY FLADC. LATER, ALLEGING NON-COMPLIANCE WITH THE
OBLIGATION UNDER THE AGREEMENT, THE MEMBERS OF THE
“T” FAMILY WERE ALLEGEDLY PREVENTED FROM ACTING AS
VICE-PRESIDENT AND TREASURER), THE “T” FAMILY FILED AN
ACTION FOR RESCISSION OF THE PRE-SUBSCRIPTION
AGREEMENT AND ASKED FOR THE LIQUIDATION OF THE
ASSETS OF FLADC. WILL THE ACTION PROSPER? EXPLAIN.
No, because the agreement is contrary to the Corporation Code.
[a] Amendments increasing and decreasing the capital stock must
not only be approved by the board and the stockholders, it must also
be registered with and approved by the SEC;
[b] The election of corporate officers is within the power of the
governing board and cannot be taken away by mere contract;
[c] The election of directors is within the power of the stockholders
exclusively and cannot be taken away by mere contract; and
[d] The management of the affairs of the corporation is a business
judgment which cannot be taken away from the board of directors.
53. HOW DOES ONE BECOME A SHAREHOLDER IN A
CORPORATION?
He becomes one by subscription (contract of unissued shares), by
purchase of shares from existing stockholders or purchase of
treasury shares from the corporation.
54. WHAT IS AN UNDERWRITING AGREEMENT?
It is a contract for subscription entered into between a promoter (also
known as underwriter) and a would-be stockholder.
55. WHAT IS THE DOCTRINE OF INDIVIDUALITY AND
INDIVISIBILITY OF SUBSCRIPTION?
A subscription is one entire and indivisible whole contract. It cannot
be divided into portions.
56. DISTINGUISH SHARE OF STOCK FROM CERTIFICATE OF
STOCK.
A share of stock is an interest in the corporation while a certificate of
stock is a paper which serves as prima facie proof of such interest.
A share of stock is a part of the capital stock of a corporation which
may be purchased or issued. On the other hand, a certificate of
stock, even if unissued, does not mean that a stockholder owns no
share in the corporation.
A share of stock is a unit of investment which an investor promises to
pay or pays for via a subscription contract. Whereas, a certificate of
share is a mere tangible evidence of the stock itself which is an
intangible property.
CLUE: Unit v. evidence; intangible v. tangible; and not fully-paid v.
fully-paid.
57. WHAT IS YOUR UNDERSTANDING OF “TREASURY
SHARES”? ARE SAID SHARES CONSIDERED: (A) ISSUED; (B)
FULLY PAID (C) OUTSTANDING (D) ENTITLED TO DIVIDENDS?
(E) MAY SUCH SHARES BE DISTRIBUTED TO THE
STOCKHOLDERS BY WAY OF DIVIDENDS? IF YES, HOW
WOULD YOU CLASSIFY THE DIVIDEND – CASH OR STOCK
DIVIDEND?
Shares  that  have  been  earlier  issued  as  fully corporation by
purchase, donation, and redemption or through some lawful means.
They are considered previously-issued, fully-paid, not outstandign
and not entitled to dividends.
They cannot be issued as dividends because they are not deemed
unrestricted.
58. WHAT ARE THE INSTANCES WHEN NON-VOTING SHARES
MAY VOTE?
[1] Amendment of articles of incorporation;
[2] Adoption and amendment of by‐laws;
[3] Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
[4] Incurring, creating or increasing bonded indebtedness;
[5] Increase or decrease of capital stock;
[6] Merger or consolidation of the corporation with another
corporation or other corporations;
[7 Investment of corporate funds in another corporation or business
in accordance with this Code;
[8] Dissolution of the corporation.
59. WHAT ARE THE LIMITATIONS ON THE ISSUANCE OF “NO
PAR VALUE” SHARES?
[1] Cannot have an issue price of less than P5.00 per share;
[2] Once issued, they shall be deemed fully paid and non-assessable
and the holders of such shares shall not be liable to the corporation
or to its creditors in respect thereto;
[3] Entire consideration received by the corporation shall be treated
as capital and shall not be available for distribution as dividends;
[4] Articles of Incorporation must state the fact that the corporation
issues no-par shares and the number of shares;
[5] Cannot be issued as preferred stocks;
[6] Cannot be issued by banks, insurance companies, trust
companies, building and loan associations, and public utilities; and
[7] Issued price may be fixed in the Articles of Incorporation, or by the
BOD pursuant to authority conferred upon it by the Articles of
Incorporation, or, in the absence thereof, by majority vote of the
outstanding shares in a meeting called for the purpose.
60. WHAT IS THE DOCTRINE OF EQUALITY OF SHARES?
Where the articles of incorporation do not provide for any distinction
of the shares of stock, all shares issued by the corporation are
presumed to be equal and enjoy the same rights and privileges and
are also subject to the same liabilities.
61. WHAT ARE WATERED STOCKS?
A stock issued in exchange for cash, property, share, stock
dividends, or services lesser than its par value.
62. WHAT IS A CERTIFICATE OF STOCK?
It is a paper representation or tangible evidence of the stock itself
and of various interests therein (Tan v. SEC, G.R. No. 95696, Mar. 3,
1992)
63. WHEN CERTIFICATE OF STOCK MAY BE ISSUED?
[a] The certificate must be signed by the president or vice‐president,
countersigned by the secretary or assistant secretary;
[b] The certificate must be sealed with the seal of the corporation;
[c] The certificate must be delivered;
[d] The par value as to par value shares, or full subscription as to no
par value shares must be fully paid, the basis of which is the doctrine
of indivisibility of subscription; and
[e] The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from the
stockholder.
Of the five above, the short answer is [d]. The subscription must be
fully-paid before the issuance of a certificate of stock.
64. HOW ARE SHARES OF STOCKS TRANSFERRED?
It depends.
If certified or represent by a certificate of stock, by indorsement and
recording in the books.
If uncertified or not represented by a certificate of stock, by deed of
sale, assignment, transfer or conveyance and recording in the books.
65. MAY A STOCKHOLDER BRING SUIT TO COMPEL THE
CORPORATE SECRETARY TO REGISTER VALID TRANSFER OF
STOCKS?
Yes, it is the corporate secretary's duty and obligation to do so.
[65B] TO BE VALID AND BINDING ON THE CORPORATION AND
THIRD PARTIES, IS THE ATTACHMENT OR MORTGAGE OF
SHARES OF STOCK REQUIRED TO BE REGISTERED IN THE
CORPORATION’S STOCK AND TRANSFER BOOKS?
No, mortgage is a voluntary dealing with shares. Involuntary dealings
(which are writs or processes issued or done against shares) are
required to be registered.
Involuntary dealing refers to such writ, order or process issued by a
court of record affecting shares of stocks which by law should be
registered to be effective, and also to such instruments which are not
the willful acts of the registered owner and which may have been
executed even without his knowledge or against his consent.
66. FG IS AN INCORPORATOR OF VC CORPORATION HAVING
SUBSCRIBED TO AND FULLY PAID 239,500 SHARES.
HOWEVER, NO CERTIFICATE OF STOCK WAS ISSUED TO FG.
IN 1968, VCP AND FG SIGNED A DOCUMENT ENTITLED
“UNDERTAKING AND INDORSEMENT” WHICH STATES:
“UNDERTAKING: I, VCP, IS THE OWNER OF THE TOTAL
SUBSCRIPTION OF FG WITH VC CORPORATION IN THE
AMOUNT OF TWO HUNDRED THIRTY-NINE THOUSAND FIVE
HUNDRED(P239,500.00) PESOS AND THAT FG DOES NOT HAVE
ANY LIABILITY WHATSOEVER ON THE SUBSCRIPTION
AGREEMENT IN FAVOUR OF VC CORPORATION. (SGD) VCP,
CONFORME: (SGD) FG. INDORSEMENT: I, FG IS INDORSING
THE TOTAL AMOUNT OF TWO HUNDRED THIRTY-NINE
THOUSAND FIVE HUNDRED(P239,500.00) STOCKS OF VC
CORPORATION TO VCP. (SGD) FG A. HOWEVER, FG REMAINS
TO BE THE STOCKHOLDER IN THE BOOKS OF THE
CORPORATION AND IT IS UNDISPUTED THAT VCP HAD NOT
MADE A REQUEST UPON THE CORPORATE SECRETARY OF VC
CORPORATION TO RECORD THE ALLEGED TRANSFER OF
STOCKS. IN 1996, VCP MADE A DEMAND FOR THE ISSUANCE
OF CERTIFICATES OF STOCK IN HIS NAME. THE DEMAND WAS
DENIED AND VCP FILED PETITION FOR MANDAMUS FOR THE
ISSUANCE OF THE CERTIFICATES.
A. WILL THE ACTION PROSPER?
No, the transfer does not bind the corporation because it was not
registered in the corporate books. The corporate secretary, as far as
she is concerned, has the duty to issue certificates of stock only
under the name of the owner thereof as registered in the books of the
corporation.
The remedy to ask for registration of his name as stockholder in the
books.
B. IN THE PROBLEM ABOVE, VCP ARGUED THAT IT IS
PRECISELY THE DUTY OF THE CORPORATE SECRETARY,
WHEN PRESENTED WITH THE DOCUMENT OF FULLY PAID
SHARES, TO EFFECT THE TRANSFER BY RECORDING THE
TRANSFER IN THE STOCK AND TRANSFER BOOK AND TO
ISSUE STOCK CERTIFICATES IN THE NAME OF THE
TRANSFEREE. IS THE CONTENTION TENABLE?
Yes, but VCP's remedy is to compel issuance of stock certificates.
His contention would be tenable if the issue is registration of transfer
and refusal to so register.
Insofar as the corporate secretary is concerned, FG is the registered
owner of the shares.
C. ASSUME THAT VCP CAN VALIDLY FILE THE PETITION FOR
MANDAMUS. CAN SUCH PETITION BE DISMISSED ON THE
GROUND OF PRESCRIPTION CONSIDERING THAT IT WAS
FILED ONLY 24 YEARS AFTER THE EXECUTION OF THE
UNDERTAKING AND INDORSEMENT?
The law does not prescribe a period within which the registration of
the transfer of shares should be effected. Hence, the action to
enforce the right does not accrue until there has been a demand and
a refusal concerning the transfer.
67. WHAT ARE THE BASIC RIGHTS OF SHAREHOLDERS?
[a] To manage the corporation by vote;
[b] To enter into voting trust agreements;
[c] To receive dividends and to compel declaration;
[d] To transfer shares and to compel registration;
[e] To be issued stock certificates;
[f] To exercise pre-emptive rights;
[g] To exercise appraisal rights;
[h] To file a derivative suit;
[i] To recover shares of stock unlawfully sold for delinquency;
[j] To inspect books;
[k] To be furnished the most recent financial statements;
[l] To be issued a new certificate in case of loss or destruction;
[m] To have the corporation dissolved;
[n] To participate in the distribution of assets upon dissolution; and
[o] In case of close corporations, to petition the SEC to arbitrate in
the event of deadlock.
68. WHAT ARE THE OBLIGATIONS OF A STOCKHOLDER?
[a] To pay the balance of his unpaid subscription/s;
[b] To pay interest on his unpaid subscriptions according to the by-
laws or the contract;
[c] To pay creditors of the corporation with respect to his unpaid
subscription based on the Trust Fund Doctrine;
[d] To pay for the water in his stocks;
[e] In case of corporation by estoppel, to be liable as a general
partner; and
[f] In case of close corporations, to be personally liable for torts if he
actively participates in the management of the corporation.
69. WHAT IS A DERIVATIVE ACTION AND ITS REQUISITES?
A derivative suit is a remedy under common law available to any
stockholder in case where corporate directors have committed a
breach of trust or fraud, negligence or ultra vires acts which have
caused directly injury to the corporation and indirect injury to the
stockholders AND in case the governing board is unwilling or unable
to institute an action to redress the wrong.
The requisites are:
[a] The party bring the suit should be a shareholder at the time the
act or transaction complained of took place;
[b] He has exhausted all intra-corporate remedies; and
[c] The cause of action actually belong to the corporation, not to the
stockholder.
In addition to the above, the act complained of must not be covered
by the stockholder's appraisal right.
70. WHAT IS A PRE-EMPTIVE RIGHT?
It is the preferential right of shareholders to subscribe to all issues or
disposition of shares of any class in proportion to their present
shareholdings. The purpose of this right is to enable the shareholder
to retain his proportionate control in the corporation and to retain his
equity in the surplus.
71. EXPLAIN THE APPRAISAL RIGHT AND WHERE IT MAY BE
EXERCISED?
It is the right to withdraw from the corporation and demand payment
of the fair value of the shares after dissenting from certain corporate
acts involving fundamental changes in corporate structure. The
amount paid to the stockholder is the fair value of his shares as of the
day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of the corporate action
The following are instances when it may be exercised:
[a] Extension or reduction or corporate term;
[b] Amendment to Articles of Incorporation which involves change in
the rights of stockholders, authorize preferences superior to those
stockholders, or restrict the right of any stockholder;
[c] Investment of corporate funds in another business or purpose;
[d] Sale or disposal of all or substantially all assets of the corporation;
and
[e] Merger or consolidation.
72. WHAT ARE THE REMEDIES OF CORPORATIONS TO
ENFORCE PAYMENT OF STOCKS? 
There are three available remedies: (a) call (to action) by resolution
of the governing board and sale of delinquent shares; and (b) judicial
action via a collection suit.
73. WHAT DOES THE TERM UNPAID CLAIM MEAN (FOR
PURPOSES OF DECLARING THE SHAREHOLDER
DELINQUENT)?
The corporation may refuse to register the transfer of shares if it has
an existing unpaid claim over the shares to be transferred. The
“unpaid claim” refers to the unpaid subscription on the shares
transferred and not to any other indebtedness that the transferor may
have to the corporation.
74. WHAT IS THE PROCEDURE FOR COLLECTION AND
DELINQUENCY SALE?
[a] If there is due date, no need for a call by the board. If there is
none, there must be a board resolution declaring the unpaid
subscription due on a specified date;
[b] Personal notice or notice by registered mail must be sent and
addressed to the concerned stockholder;
[c] If he fails to pay within 30 days from call or due date, the unpaid
shares shall be subjected to delinquency sale;
[d] Board resolution ordering the sale must be issued stating the
amount, date, time and place of sale;
[e] The sale shall shall be made not earlier than 30 days but not later
than 60 days from date of delinquency;
[f] Note of sale with a copy of the board resolution shall be send to
every delinquent shareholder in person or by mail;
[g] Publication of notice of sale for 2 consecutive weeks;
[h] Sale to the bidder who offered the full amount of the balance of
subscription including all costs for the smallest number of shares;
[i] Registration in the name of the winning bidder and issuance of
certificate under his name;
[j] Remaining (paid) shares shall be credited to the delinquent
shareholder; and
[k] If there is no bidder, the corporation may purchase and pay for the
shares.
75. WHAT ARE THE EFFECTS OF STOCK DELINQUENCY?
No delinquent stock shall be voted for or be entitled to vote or to
representation at any stockholder’s meeting, nor shall the holder
thereof be entitled to any of the rights of a stockholder except the
right to dividends in accordance with the provisions of this Code, until
and unless he pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if any.
Any cash dividends due on delinquent stock shall first be applied to
the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid.
Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder.
76. WHAT BOOKS ARE REQUIRED TO BE MAINTAINED BY THE
CORPORATION?
[a] Book for the minutes of shareholder and board meetings;
[b] Record of transactions;
[c] Stock and transfer book; and
[d] Other books required to be kept.
77. WHAT IS THE PROBATIVE VALUE OF THE STOCK AND
TRANSFER BOOK?
The entries are considered prima facie evidence of the matters stated
therein and may be subject to proof to the contrary. (G.R. No.
123553)
78. WHAT ARE THE REQUIREMENTS FOR THE EXERCISE OF
THE RIGHT OF INSPECTION?
[a] It must be exercised at reasonable hours on business days;
[b] The stockholder has not improperly used any information he has
secured through any previous examination; and
[c] Demand is made in good faith or for a legitimate purpose.
79. DISTINGUISH
A. MERGER FROM CONSOLIDATION
Merger happens when a corporation absorbs another. On the other
hand, consolidation occurs when two or more corporations form one
new corporation.
In the first, one corporation survives. In the second, all constituent
corporations are dissolved.
In the first, no new corporation is created. In the second, a single,
new corporation emerges.
In the first, assets and liabilities are acquired by the surviving
corporation. In the second, they are transferred to the new
corporation.
B. ESTOPPEL FROM SUBSEQUENT COMPLIANCE
A corporation by estoppel is a legal device to protect the corporation
or third persons from deceit or fraud in dealings. Hence, despite lack
of registration of the corporation, the law treats those who purport to
act as a corporation liable as a corporation.
On the other hand, subsequent compliance with legal requirements
for incorporation makes the corporation one de facto prior to such
compliance.
80. WHAT IS THE EFFECT OF NON-USE OF CORPORATE
CHARTER AND CONTINUOUS INOPERATION OF
CORPORATION?
Revocation or forfeiture of the franchise or certificate of incorporation
due to its misuse or non‐use pursuant to quo warranto proceedings
filed by the Solicitor General.
Under the old corporation code, failure to organize and commence
business within 2 years from incorporation results in its corporate
powers ceasing and the corporation shall be deemed dissolve.
In the new law, the period is 5 years and the effect is "deemed
revoked."
Under the old law, in case of continuous inoperation for at least 5
years, this is a ground for the suspension or revocation of corporate
franchise or certificate of incorporation.
In the new law, the same period is prescribed but the effect is
"declaration of delinquency status" which may be removed by
compliance within 2 years.
81. IN THE ARTICLES OF INCORPORATION OF T
CORPORATION, ELEVEN MEMBERS WERE NAMED TO
CONSTITUTE THE BOARD OF DIRECTORS. THESE ELEVEN
ELECTED FROM AMONG THEMSELVES A SECRETARY-
TREASURER BUT DID NOT ELECT A PRESIDENT. THE BOARD
USED TO HOLD MEETINGS TO TRANSACT BUSINESS, WHICH
WAS DONE THROUGH THE SECRETARY-TREASURER. IN A
PROCEEDING TO FORFEIT ITS CHARTER, THE QUESTION WAS
POSED AS TO WHETHER THE CORPORATION MAY BE
CONSIDERED TO HAVE FORMALLY ORGANIZED. RESOLVE
THE QUESTION.
There are two views on this.
In Benguet Consolidated Mining v. Pineda, the Supreme Court held
that formal organization means that the corporation has taken
necessary steps to endow it with the capacity to transact legitimate
business in line with its purpose. The Court said that this includes the
election of officers, adoption of by-laws, subscription and payment
transactions and other steps.
However, Ladia (2015) opines that it is enough that the corporation
has functioned and engaged in the business for which it was formed
and its charter cannot be forfeited simply because it has failed to a
president or a secretary.
82. HOW MAY A CORPORATION DISSOLVE? AND WHAT ARE
THE MODES OF DISSOLUTION? WHAT ARE THE EFFECTS?
It is the extinguishment of the franchise of a corporation and the
termination of its corporate existence. Dissolution may be voluntary
or involuntary.
If voluntary and there are no creditors affected, it is done by filing a
resolution approved by the board and the stockholders with the SEC.
This resolution must authorize dissolution and it must be certified and
countersigned.
If voluntary and there are creditors affected, by filing a verified
petition for dissolution with the SEC.
Voluntarily, there may also be a dissolution by shortening the
corporate term. This is done by amendment.
Voluntarily, in the case of corporate soles, mere filing of a declaration
of dissolution by the presiding elder.
Voluntarily, by merger or consolidation.
Voluntarily, by expiration of corporate term without extension. Note
that, under the new law, there is no perpetual corporate existence.
Involuntarily, the following are modes of dissolution:
[a] By expiration but with failure to extend;
[b] Failure to organize and commence;
[c] Continuous inoperation and delinquency for more than 2 years;
[d] Legislative dissolution; and
[e] Dissolution by the SEC.
83. WHAT IS LIQUIDATION?
Liquidation is the process by which all the assets of the corporation
are converted into liquid assets (cash) in order to facilitate the
payment of obligations to creditors, and the remaining balance if any
is to be distributed to the stockholders. It is a proceeding in rem.
84. WHAT CONSTITUTES “DOING BUSINESS” IN THE
PHILIPPINES FOR FOREIGN CORPORATIONS?
[a] Under the Continuity Test, doing business implies a continuity of
commercial dealings and arrangements, or performance of acts
normally incidental to the purpose and object of the organization.
[b] Under the Substance Test, a foreign corporation is doing business
in the country if it is continuing the body or substance of the
enterprise of business for which it was organized.
[c] Under the contract test, a foreign corporation is doing business in
the Philippines if the contracts entered into by the foreign corporation
or by an agent acting under the control and direction of the foreign balance of receivables because this would amount to distribution of
corporation are consummated in the Philippines. the capital of the corporation. Members of a non‐stock corporation
[d] Under statutory definition, doing business means: are not entitled to distribution of capital. They are only entitled to
distribution of capital upon dissolution when it is provided for in the
[i] Soliciting orders, service contracts, or opening offices; articles of incorporation or by‐laws.
[ii] Appointing representatives, distributors domiciled in the
Philippines or who stay for a period or periods totaling 180 days or
more;
[iv] Participating in the management, supervision, or control of any
domestic business, firm, entity, or corporation in the Philippines; or
[v] Any act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to some extent the performance of
acts or works or the exercise of some functions, normally incident to
and in progressive prosecution of the purpose and object of its
organization.

According to the Supreme Court, it relates to “business activities…

not only casual, but so systematic and regular as to manifest
continuity and permanence of activity to constitute doing business
here…” To constitute doing business in the Philippines, the activity
should involve profitmaking.

85. DOES AN “ISOLATED TRANSACTION” BY A FOREIGN

CORPORATION QUALIFY AS “DOING BUSINESS” IN THE
PHILIPPINES?

No. Foreign corporations, even unlicensed ones can sue or be sued

on a transaction or series of transactions set apart from their
common business in the sense that there is no intention to engage in
a progressive pursuit of the purpose and object of business
transaction.

86. EXPLAIN THE CONTRACT TEST OF “DOING BUSINESS” IN

THE PHILIPPINES.

Under the contract test, a foreign corporation is doing business in the

Philippines if the contracts entered into by the foreign corporation or
by an agent acting under the control and direction of the foreign
corporation are consummated in the Philippines.

87. WHAT ARE THE REQUIREMENTS FOR CLOSE

CORPORATIONS?

A close corporation is onee whose articles of incorporation provide

that:

[a] All issued stock, exclusive of treasury shares, shall be held by

persons not exceeding 20;
[b] All issued stock shall be subject to one or more specified
restrictions on transfer; and
[c] The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a

close corporation when at least 2/3 of its voting stock or voting rights
is owned or controlled by another corporation which is not a close
corporation.

Any corporation may be incorporated as a close incorporation,

except:

[a] Mining or oil companies;

[b] Stock exchanges;
[c] Banks;
[d] Insurance companies;
[e] Public utilities;
[f] Educational institutions; and
[g] Corporations declared to be vested with public interest.

88. CAN A NON-STOCK CORPORATION OFFSET UNUSED

CONTRIBUTIONS OF MEMBERS AGAINST THE BALANCE OF
RECEIVABLES FROM THE SAME MEMBERS?

The unused contributions of members cannot be offset against the