VI.

The Corporation Code formation, organization, or regulation of private

corporations.” The same provision is contained
A. Corporation
in Section 7, Article XIV of the 1935 Constitution
and Section 4, Article XIV of the 1973
Constitution. (BAR 2008)
1. Distinguish clearly (1) a private corporation
from a public corporation; and (2) a stock
corporation from a non-stock corporation.
3. Your client Dianne approaches you for legal
advice on putting up a medium-sized restaurant
business that will specialize in a novel type of
Answer: A private corporation is one formed cuisine. As Dianne feels that the business is a
for some private purpose, benefit or end, while little risky, she wonders whether she should use
a public corporation is formed for the a corporation as the business vehicle, or just
government of a portion of the State for the run it as a single proprietorship. She already has
general good or welfare. The true test is the an existing corporation that is producing meat
purpose of the corporation. If the corporation is products profitably and is also considering the
created for political or public purpose connected alternative of simply setting up the restaurant
with the administration of government, then it as a branch office of the existing corporation.
is a public corporation. If not, it is a private
corporation although the whole or substantially
the whole interest in the corporation belongs to
Briefly explain to your client what you see as
the State. A public corporation is created by
the legal advantages and disadvantages of using
special legislation or act of Congress. A private
a separate corporation, a single proprietorship,
corporation must be organized under the
or a branch of an existing corporation for the
Corporation Code.
proposed restaurant business.

A stock corporation is one that has capital stock

Answer:
divided into shares and is authorized to
distribute to the holders of such shares If Dianne will set up a separate corporation, her
dividends or allotment of the surplus profits on liability for its obligations and losses will be
basis of the shares held. All other corporations limited to the amount of her subscription in the
are non-stock corporations. (BAR 2004) absence of showing that there is a ground to
disregard its separate juridical personality. If
she were to operate a single proprietorship, her
2. Since February 8, 1935, the legislature has liability for its debts and losses will be
not passed even a single law creating a private unlimited.
corporation. What provision of the Constitution
precludes the passage of such law?
The formation and the operation of a
corporation require a great deal of paper work
Answer: Section 16, Article XII of the 1987 and record-keeping. This is not the situation in
Constitution states “The Congress shall not, the case of a single proprietorship.
except by general law, provide for the
If she were to set-up the restaurant as a branch estate business. Because of the regional crisis,
office an existing corporation, the corporation the stockholders decided to convert their stock
will have more funds as capital than if she were corporation into a charitable non-stock and
to form a separate corporation. However, all non-profit association by amending the articles
the assets of the existing corporation will be of incorporation.
liable for the debts and losses of the restaurant
business. (BAR 2010)
a) Could this be legally done? Why? b) Would
your answer be the same if at the inception, “X”
Stock Corporation and Non-stock Corporation company is a non-stock corporation? Why?

1. “XY” is a recreational club which was Answer: a) Yes, it can be legally done. In
organized to operate a golf course for its converting the stock corporation to a non-stock
members with an original authorized capital corporation by a mere amendment of the
stock of P100 M. the articles of incorporation Articles of Incorporation, the stock corporation
nor the by-laws did not provide for distribution is not distributing any of its assets to the
of dividends although there is a provision that stockholders. On the contrary, the stockholders
after its dissolution, the assets shall be given to are deemed to have waived their right to share
a charitable corporation. Is “XY” a stock in the profits of the corporation which is a gain
corporation? Give reasons for you answer. not a loss to the corporation. b) No, my answer
will not be the same. In a non-stock
corporation, the members are not entitled to
Answer: “XY” is a stock corporation because it is share in the profits of the corporation because
organized as a stock corporation and there is no all present and future profits belong to the
prohibition in its Articles of Incorporation or in corporation. In converting the non-stock
its by-laws for it to declare dividends. When a corporation to a stock corporation by a mere
corporation is organized as a stock corporation amendment of the Articles of Incorporation, the
and its Articles of Incorporation or By-Laws are non-stock corporation is deemed to have
silent, the corporation is deemed to have the distributed an asset of the corporation—i.e. its
power to declare dividends under Section 43. profits, among its members, without a prior
Since it has the power to declare dividends, dissolution of the corporation. Under Section
“XY” is a stock corporation. 122, the non-stock corporation must be
dissolved first. (BAR 2001)

The provision in its Articles of Incorporation

that at dissolution the assets of the corporation 3. Distinguish clearly a stock corporation from a
shall be given to a charitable corporation does non-stock corporation.
not prohibit the corporation from declaring
dividends before dissolution. (BAR 2001)
Answer: A stock corporation is one that has
capital stock divided into shares and is
2. “X” company is a stock corporation authorized to distribute to the holders of such
composed of the Reyes family engaged in real shares dividends or allotment of the surplus
profits on basis of the shares held. All other 1. Mamuhunan was invited by his friends to
corporations are non-stock corporations. (BAR invest in Adelantado Corporation, a newly
2004) organized firm engaged in money market and
financing operations. Because of his heavy
investments, Mamuhunan became the firm’s
1. Definition 2. Attributes of the Corporation 3. President and, as such, purchased a big number
Distinguished from Partnership of computers, typewriters and other equipment
from Taktak Corporation on installment basis.
1. a) What is a joint account? b) Distinguish joint Adelantado Corporation paid the down
account from partnership. payment and Taktak Corporation issued the
corresponding receipt. To his chagrin,
Mamuhunan discovered that the articles of
Answer: a) A joint account is a transaction of incorporation had not been filed by his friends
merchants where other merchants agree to at that late date so he hurriedly attended to the
contribute the amount of capital agreed upon, matter. No sooner had the certificate of
and participating in the favorable or incorporation been issued by the SEC three
unfavorable results thereof in the proportion months later when Adelantado Corporation
they may determine. became bankrupt.

b) The following are the distinctions between Upon being sued by Taktak Corporation in his
joint account and partnership: 1. A partnership personal capacity, Mamuhunan raised among
has a firm name while a joint account has none his defenses the doctrines of de facto
and is conducted in the name of the ostensible corporation and corporation by estoppel.
partner. 2. While a partnership has juridical
personality and may sue or be sued under its
firm name, a joint account has no juridical Can the two defenses be validly raised by
personality and can sue or be sued only in the Mamuhunan? Explain.
name of the ostensible partner. 3. While a
partnership has a common fund, a joint account
has none. 4. While in a partnership, all general
Answer: Neither the doctrine of de facto
partners have the right of management, in a
corporation nor the doctrine of corporation by
joint account, the ostensible partner manages
estoppel is applicable or of relevance. An attack
its business operations. 5. While liquidation of a
against a de facto corporation may be raised
partnership may, by agreement, be entrusted to
only by the State. In the case of a corporation by
a partner or partners, in a joint account
estoppel, rights or defenses are established in
liquidation thereof can only be done by the
favor of persons with whom the corporation
ostensible partner. (BAR 2000)
deals but not in favor of those who represent
themselves as such corporation where none
exists. Mamuhunan, instead, may raise the
B. Other Classes of Corporations defense that personal liability on the part of
1. De facto vs. De jure officers and directors of a corporation is
incurred only in cases of patently illegal acts
committed or consented to by them, bad faith
or gross negligence on their part and in conflict A corporation by estoppels exists when person
of interest situations, not one of which is assume to act as a corporation knowing it to be
involved in the problems. (BAR 1986) without authority to do so. In this case, those
persons will be liable as general partners for all
debts, liabilities and damages incurred or arising
as a result of their actions. (BAR 2004)

2. A corporation was created by a special law.

Later, the law creating it was declared invalid.
4. The Articles of Incorporation of AAA
May such corporation claim to be a de facto
Corporation was approved by SEC. After the
corporation?
receipt of the Certificate of Approval from the
SEC, AAA Corporation decided to immediately
start the operation of its business despite the
Answer: No. a private corporation may be fact that it has no approved By-Laws. What is
created only under the Corporation Code. Only the legal status of the AAA Corporation?
public corporation may be created under a
special law.
a) A de jure corporation; b) A de facto
corporation; c) A corporation by estoppels; d)
Where a private corporation is created under a An unregistered corporation.
special law, there is no attempt at a valid
incorporation. Such corporation cannot claim a
de facto status. (BAR 1994)
Answer: a) A de jure corporation. (BAR 2012)

3. Is there a difference between a de facto

2. Corporation by Estoppel
corporation and a corporation by estoppel?
Explain briefly. 1. Mamuhunan was invited by his friends to
invest in Adelantado Corporation, a newly
organized firm engaged in money market and
Answer: A de facto corporation is one which financing operations. Because of his heavy
actually exists for all practical purposes as a investments, Mamuhunan became the firm’s
corporation but which has no legal right to President and, as such, purchased a big number
corporate existence as against the State. It is of computers, typewriters and other equipment
essential to the existence of a de facto from Taktak Corporation on installment basis.
corporation that there be: 1. A valid law under Adelantado Corporation paid the down
which a corporation might be incorporated 2. A payment and Taktak Corporation issued the
bona fide attempt to organize as a corporation corresponding receipt. To his chagrin,
under such law, and 3. Actual use or exercise in Mamuhunan discovered that the articles of
good faith of corporate powers conferred upon incorporation had not been filed by his friends
it by law at that late date so he hurriedly attended to the
matter. No sooner had the certificate of
incorporation been issued by the SEC three
months later when Adelantado Corporation
became bankrupt.
Answer: Alphabet not having been issued as yet
a certificate of registration of its articles of
incorporation (for its failure to meet the
Upon being sued by Taktak Corporation in his
minimum paid-up requirement) is without any
personal capacity, Mamuhunan raised among
legal personality, and it cannot thus itself be
his defenses the doctrines of de facto
made liable for the breach of contract. The rule,
corporation and corporation by estoppel.
furthermore, is that contracts for and in behalf
of a corporation prior to its incorporation are
not binding on it unless and until they are
Can the two defenses be validly raised by approved, expressly or impliedly, by its board of
Mamuhunan? Explain. directors after due incorporation. A, B, C, D and
E themselves, as a rule, would not themselves
be liable for the breach of contract subject
Answer: Neither the doctrine of de facto however, to their respective representations
corporation nor the doctrine of corporation by and extent thereof. Preincorporation expenses,
estoppel is applicable or of relevance. An attack in general, are for the account of the
against a de facto corporation may be raised corporation and unless, in general, are for the
only by the State. In the case of a corporation account of the corporation and unless the
by estoppel, rights or defenses are established corporation is fictitious, the incorporators or
in favor of persons with whom the corporation stockholders are not personally liable therefore.
deals but not in favor of those who represent (BAR 1989)
themselves as such corporation where none
exists. Mamuhunan, instead, may raise the
defense that personal liability on the part of 3. Is there a difference between a de facto
officers and directors of a corporation is corporation and a corporation by estoppel?
incurred only in cases of patently illegal acts Explain briefly.
committed or consented to by them, bad faith
or gross negligence on their part and in conflict
of interest situations, not one of which is
Answer: A de facto corporation is one which
involved in the problems. (BAR 1986)
actually exists for all practical purposes as a
corporation but which has no legal right to
corporate existence as against the State. It is
2. (1) A, B, C, D & E decided to form Alphabet, essential to the existence of a de facto
Inc., a corporation dealing with the corporation that there be: 5. A valid law under
manufacture and sale of school supplies, with which a corporation might be incorporated 6. A
an authorized capital stock of P1 M. The five bona fide attempt to organize as a corporation
equally subscribed to 25% of the authorized under such law, and 7. Actual use or exercise in
capital stock or P50,000 each. Even before they good faith of corporate powers conferred upon
could pay the 25% of their total subscription, it by law
however, they entered into a contract with
Manila College. Determine the liability of A, B,
C, D, and E and Alphabet, Inc. vis-à-vis Manila
College.
A corporation by estoppels exists when person Answer: A corporation is deemed to be “going
assume to act as a corporation knowing it to be public” when it decide to list its shares in the
without authority to do so. In this case, those stock exchanges. The term can also be used to
persons will be liable as general partners for all convey the fact that a corporation would
debts, liabilities and damages incurred or arising initially go into a public offering of its shares or
as a result of their actions. (BAR 2004) to otherwise invite equity investments from the
public. A corporation is said to be “going
private” when it would restrict equity
4. Unknown to the other four proponents, investment in the corporation within the
Enrico (who had been given the task of organization itself or its existing subject
attending to the Articles of Incorporation of the structure. In another context, the term can
proposed corporation, Auto Mo, Ayos Ko) likewise be understood as a corporation whose
misappropriated the filing fees and never filed articles of incorporation would have the feature
the Articles of Incorporation with the SEC. of a close or closely-held corporation.
instead, he prepared and presented to the
proposed incorporators a falsified SEC
certificate approving the Articles. Relying on the It might be pointed out that the above terms do
falsified SEC certificate, the latter began not have technical meanings either in law or in
assuming and discharging corporate powers. business finance. Accordingly, a layman’s
understanding thereof, such as for instance, the
Auto Mo, Ayos Ko is a ______.
disposition of ownership by the government of
a) De jure corporation; b) De facto corporation; GOCC to the private sector would be acceptable
c) Corporation by estoppel; d) General in describing a corporation “going private”.
partnership; e) None of the above. (BAR 1986)

Answer: c) Corporation by estoppel— if the D. Nationality of Corporations

term “latter” refers to the incorporators. e)
1. Place of Incorporation Test 2. Control Test
None of the above—if the term “latter” refers
to Enrico. (BAR 2013) 1. What is the nationality of a corporation
organized and incorporated under the laws of a
foreign country, but owned 100% by Filipinos?
C. Corporations going public vs. Corporations
going private
Answer: Under the control test of corporate
nationality, this foreign corporation is of Filipino
1. Distinguish between a corporation that is Nationality.
“going public” and a corporation that is “going
private”. What provisions would you expect to
find in the articles of incorporation of a Where there are grounds for piercing the veil of
corporation that organizes itself under the corporate entity, that is, disregarding the
narrow concept of “going private” fiction, the corporation will follow the
nationality of the controlling members or
stockholders, since the corporation will then be Answer: a) R.A. 1180, otherwise known as the
considered as one and the same. (BAR 1998) Retail Trade Nationalization Law, prohibits a
corporation the capital of which is not wholly
owned by Filipino citizens from engaging,
2. Several American doctors wanted to set up a directly or indirectly in retail business. While
group clinic in the Philippines so they could there are certain statutes that define a
render modern medical services. If the clinic is Philippine national as including a corporation
to be incorporated under our laws, what is the organized under Philippine laws of which at
required foreign equity participation in such a least 60% of the capital stock and entitled to
corporation? vote is owned and held by Philippine citizens,
there are certain administrative regulations that
trace the citizenship of stockholders of
a. 40% corporations holding shares in another
corporation to the so-called “grandfather
b. 0% c. 60% d. 70% rule”—in determining the citizenship of the
affected corporation. Considering the intent
and purpose of the law, and the rather
Answer: b. 0% (BAR 2011) peremptory provisions in respect of a violation
thereof, it would be prudent and advisable to
consider ACME as not qualified to engage in the
retail business. The 40% holding of aliens in XYZ
Corporations, which holds 50% of ACME’s
3. Grandfather Rule
capital stock, may be viewed as a circumvention
1. Acme Manufacturing Co. (ACME) is engaged of the Filipino ownership requirement. Note
in the manufacture of electrical equipment. Its that the law prohibits a non-qualified entity
general manager is Otto, a German engineer. from “indirectly” engaging in retail business. To
50% of the capital stock of ACME is owned by hold ACME is qualified would render it relatively
Filipino individuals and the remaining 50% is easy for a non-qualified corporation such as XYZ
owned by corporation XYZ, whose stock is in Corporation to join with other qualified Filipinos
turn 60% Filipino-owned and 40% German- to subvert the requirement that the corporation
owned. be wholly owned by Filipinos.

a) Is ACME eligible to engage in the retail b) “Retail business” is defined as habitually

business? b) If ACME sells some of the electrical selling direct to the general public merchandise
equipment produced by it to industrial and or goods for consumption. P.D. 714 expanded
manufacturing firms which would use the same the exceptions from the coverage of the law to
in their establishments, would there be a include manufacturer or processor selling to
violation of the Retail Trade Nationalization industrial or commercial users or consumers
Law? From the legal standpoint, would it be who use the products bought by them to render
necessary to replace Otto with a Filipino general service to the general public and/or to produce
manager if Corporation XYZ sells its shares to a or manufacture goods which are in turn sold by
wholly-owned Filipino company? them.
The question is whether the term “use”
encompasses within its purview not only “direct
Since it is believed that ACME will not be
use” but likewise “indirect use” of the products
engaged in retail business by selling electrical
bought (electrical equipment) by the industrial
equipment produced by it to industrial and
manufacturing firms to render service to the
manufacturing firms, the prohibitions of the
general public and/or to produce or
Anti Dummy Law will not apply to Otto, even
manufacture goods which are in turn sold by
though German, may continue as general
them. Whether a product is “indirectly used” to
manager. (BAR 1984)
render service or to produce or manufacture
goods for sale is generally a question of fact as
well as the degree of utility of the product. In
the case of electrical equipment, there can be E. Rules on Partly-Nationalized Business
no serious question that it is indispensably used
and necessary in any establishment wherein
electricity is used. Moreover, the essence of the 1. X Mining Co. is 70% Filipino-owned, the 30%
exception created by P.D. 714 is the sale to an remaining stock being owned by aliens. Under
industrial or commercial user or consumer. its Articles of Incorporation, its Board of
Directors has 9 members. At the last election, 3
Accordingly, ACME’s sales of electrical aliens were elected as Directors, but some
equipment to industrial and manufacturing firm stockholders moved to disqualify all three of
which would use the same in their them on account of their alien citizenship, the
establishments do not constitute “retail mining company being engaged in a
business” as such sales fall within the purview nationalized business.
of section 4(c) of R. A. 1180, as amended by P.D.
714. There would be no violation of the Retail
Trade Nationalization Law. Decide with reasons.

The Anti Dummy Law penalizes, among others, Answer: Under the Constitution, the mining
any corporation which is engaged in a business is partially nationalized and at least
nationalized activity such as retail business 60% of its capital must belong to Filipino
which in any manner permits or allows any citizens. Under the Anti-Dummy Law as
person not possessing the qualifications amended, the election of aliens as members of
required by the law, to intervene in the the board of directors of corporations engaged
management, operation, administration or in partially nationalized activities is allowed in
control thereof, whether as an officer, proportion to their allowable participation or
employee or laborer therein, with or without share in the capital of such corporations. In the
remuneration. case at hand, 70% of the capital is owned by
Filipinos and 30% by aliens. Therefore, only 30%
of its directors may be aliens. Since 3 out of 9 is
If Corporation XYZ sells its shares to a wholly more than 30% only 2 aliens may sit in X’s
owned Filipino company, ACME would become board. One of the elected alien directors is
a corporation wholly owned by Filipinos and therefore disqualified and must give way to a
qualified to engage in retail business. Filipino director. (BAR 1983)
 With the additional logging activity, can the
Korean nationals still be a member of the Board
2. Bohol Mining Corporation is 60% Filipino-
of Directors? Explain.
owned and 40% Canadian-owned. As provided
in its Articles of Incorporation and By-Laws, its
Board of Directors is composed of 9 members.
Answer: Yes. The Korean national can still be a
During the last annual stockholders meeting
member of the board of directors, if he has
held on May 31, three of the nine elected
sufficient equity to entitle him to a seat. Since
directors were Canadian citizens. Juan de la
the corporation is only required to be at least
Cruz together with two other Filipino
60% owned by Filipino citizens, foreigners can
stockholders petitioned the SEC to disqualify
be members of the board of directors in
the said three Canadians and to enjoin them
proportion to their equity which cannot exceed
from discharging their functions as directors, on
40%. (BAR 2005)
the grounds that (1) aliens cannot participate in
any capacity in a nationalized industry, like
mining; and (2) the exploitation of natural
resources is reserved under the Constitution to 4. The Articles of Incorporation of ABC
Filipino citizens. Transport Co., a public utility, provides for 10
members in its Board of Directors. What is the
prescribed minimum number of Filipino citizens
in its Board?
Will the petition prosper?

a. 10 b. 6 c. 7 d. 5
Answer: The petition will not prosper. The
elections of aliens as members of the board of
directors or governing body of corporations or
associations, engaging in partially nationalized- Answer: b. 6 (BAR 2011)
activities, are allowed by law, in proportion to
their allowable participation or share in the
capital of such entities, like mining or 5. Bell Philippines, Inc. (BelPhil) is a public utility
development of natural resources, in which the company, duly incorporated and registered with
foreigners may even own 40% of the capital. the SEC. its authorized capital stock consists of
(BAR 1985) voting common shares and non-voting
preferred shares, with equal par values of
P100/share. Currently, the issued and
3. A Korean national joined a corporation which outstanding capital stock of BelPhil consists only
is engaged in the furniture manufacturing of common shares shared between Bayani Cruz,
business. He was elected to the Board of a Filipino with 60% of the issued common
Directors. To complement its furniture shares, and Bernard Fleet, a Canadian, with
manufacturing business, the corporation also 40%.
engaged in the logging business.

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 May Zebra Corporation recover moral damages
corporate action on the ground that the foreign based on its allegations in the complaint?
equity holdings in the company would now Discuss.
exceed the 40% foreign equity limit allowed
under the Constitution for public utilities.
Answer: Zebra cannot recover moral damages
for the mental anguish, social humiliation, and
Rule on the legality of Bernard Fleet’s current serious anxiety of its president, Anton, as a
holdings. result of the tortuous acts of Omega; and this is
so, because Zebra has a separate and distinct
personality from that of its president; hence,
Answer: The holding of Bernard Fleet Anton will be the one personally, to have said
equivalent to the outstanding common shares is right of action, if any. (BAR 1985)
illegal. His holdings of preferred shares should
not exceed 40%. Since the constitutional
requirement of 60% Filipino ownership of the 2. Richard owns 90% of the shares of the capital
capital of public utilities applies not only to stock of GOM Corporation. On one occasion,
voting control but also to beneficial ownership GOM Corporation, represented by Richard as
of the corporation, it should also apply to the President and General Manager, executed a
preferred shares. Preferred shares are also contract to sell a subdivision lot in favor of
entitled to vote in certain corporate matters. Tomas. For failure of GOM Corporation to
The State shall develop a self-reliant and develop the subdivision, Tomas filed an action
independent national economy effectively for rescission and damages against GOM
controlled by Filipinos. The effective control Corporation and Richard.
here should be mirrored across the board on all
kinds of shares. (BAR 2013)
Will the action prosper? Explain.

F. Corporate Juridical Personality

Answer: The action may prosper against GOM
1. Doctrine of Separate Juridical Personality
Corporation but definitely not against Richard.
1. In a complaint for damages, Zebra Richard has a legal personality separate and
Corporation allege that its president, Anton distinct from that of GOM Corporation. If he
Molina, suffered mental anguish, social signed the contract to sell, he did so as the
humiliation and serious anxiety as a result of President and General Manager of GOM
the tortuous acts of Omega Corporation. In its Corporation and not in his personal capacity.
answer with counterclaim, Omega Corporation Mere ownership by Richard of 90% of the
alleged that it suffered besmirched reputation capital stock of GOM Corporation is not of itself
because of the unfounded suit of Zebra sufficient ground to disregard his separate legal
Corporation and accordingly claimed for the personality absent a showing, for example, that
award of moral damages. he acted maliciously or in bad faith. (BAR 1996)
3. As a result of perennial business losses, a to a hundred thousand pesos or to vacate the
corporation’s net worth has been wiped out. In premises at the end of the month. Marulas
fact, it is now in negative territory. Nonetheless, neither paid its debt nor vacated the premises.
the stockholders did not like to give up. X sued Marulas and Y for collection of the
unpaid rentals, plus interest and costs of
litigation. Will the suit prosper against X?
Creditor-banks, however, do not share the Against Y?
confidence of the stockholders and refuse to
grant more loans.
Answer:

Assuming that the corporation continues to

operate even with depleted capital, would the Yes, the suit will prosper against Marulas. It is
stockholders or the managers be solidarily liable the one renting the office and store space, as
for the obligations incurred by the corporation? lessee, from the owner of the building, X, as
Explain. lessor.

Answer: No. As a general rule, the stockholders But the suit against Y will not prosper. Y, as
or the managers cannot be held solidarily liable president and general manager, and also
for the obligations incurred by the corporation. stockholder of Marulas Creative Technology,
The corporation has a separate and distinct Inc., has a legal personality separate and
personality from that of the stockholders and distinct from that of the corporation and not
managers. The latter are presumed to be acting that of its officers and stockholders who are not
in good faith in continuing the operation of the liable for corporate liabilities. (BAR 2000)
corporation. The obligations incurred by the
corporation are those of the corporation which
alone is liable therefor. However, when the 5. Nine individuals formed a private corporation
corporation is already insolvent, the directors pursuant to the provisions of the Corporation
and officers become trustees of the business Code of the Philippines. Incorporator S was
and assets of the corporation for the benefit of elected director and president—general
the creditors and are liable for negligence or manager. Part of his emolument is a Ford
mismanagement. (BAR 1999) Expedition, which the corporation owns. After a
few years. S lost his corporate positions but he
refused to return the motor vehicle claiming
4. Marulas Creative Technology Inc., an e- that as a stockholder with a substantial equity
business enterprise engaged in the manufacture share, he owns that portion of the corporate
of computer multimedia accessories, rents an assets now in his possession. Is the contention
office and store space at a commercial building of S valid? Explain.
owned by X. being a start-up company, Marulas
enjoyed some leniency in its rent payment; but
after 3 years, X put a stop to it and asked Answer: No. the contention of S is not valid. The
Marulas president and general manager, Y, who Ford Expedition is owned by the corporation.
is a stockholder, to pay back rentals amounting The corporation has a legal personality separate
and distinct from that of its stockholder. What officers. After 2 years, X Corp. dismissed its call
the corporation owns is its own property and center agents for no apparent reason. The
not property of any stockholder even how agents filed a collective suit for illegal dismissal
substantial the equity share that stockholder against both X Corp. and Y Corp. based on the
owns. (BAR 2000) doctrine of piercing the veil of corporate fiction.
The latter set up a defense that the agents are
in the employ of X Corp. which is a separate
6. Nelson owned and controlled Sonnel juridical entity. Is the defense appropriate?
Construction Company. Acting for the company,
Nelson contracted the construction of a
building. Without first installing a protective net a. No, since the doctrine would apply, the two
atop the sidewalks adjoining the construction companies having the same set of corporate
site, the company proceeded with the officers. b. No, the real employer is Y Corp., the
construction work. One day a heavy piece of pizza company, with X Corp. serving as an arm
lumber fell from the building. It smashed a for receiving its outside orders for pizzas. c. Yes,
taxicab which at that time had gone offroad and it is not shown that one company completely
onto the sidewalk in order to avoid the traffic. dominates the finances, policies, and business
The taxicab passenger died as a result. practices of the latter. d. Yes, since the two
companies perform two distinct businesses.

If you were the counsel for Sonnel Construction,

how would you defend your client? What would Answer: b. Yes, it is not shown that one
be your theory? company completely dominates the finances,
policies, and business practices of the latter.
(BAR 2011)
Answer: If I were the counsel for Sonnel
Construction Company, I will argue that the
proximate cause of the death of the victim is 8. X sold all his shares in AAA Hotel Corporation
the gross negligence of the taxicab driver. The to Y. X owns 99% of AAA Hotel Corporation. As
latter drove the taxicab offroad and onto the the new owner, Y wanted a reorganization of
sidewalk in order to avoid the traffic. the hotel which is to include primarily the
Furthermore, I will argue that assuming that separation of all existing employees and the
Nelson was negligent, he alone should be sued hiring of new employees. Which statement is
as the Sonnel Coonstruction Company has a most accurate?
separate and distinct personality. Nelson’s
controlling interest in Sonnel Construction
Company does not justify the piercing of the a) With the change in ownership, in effect there
corporate veil. (BAR 2008) is a new juridical entity and therefore all
employees are considered separated; b) Despite
the change in shareholder, there is actually no
7. X Corp. operates a call center that received change in the juridical entity and therefore
orders for pizzas on behalf of Y Corp. which existing employees cannot automatically be
operates a chain of pizza restaurants. The two considered separated; c) Y, as the new
companies have the same set of corporate shareholder, has the right to retain only those
employees who in his judgment are qualified; d) finding DSecurities, Inc. liable to Rehouse
For as long as the existing employees are given Corporation for P10 M. Subsequently, the writ
their separation pay, they can be terminated. of execution was issued but returned
unsatisfied because D-Securities had no more
assets to satisfy the judgment. Rehouse moved
Answer: b) Despite the change in shareholder, for an Alias Writ of Execution against Fairfield
there is actually no change in the juridical entity Bank (FB), the parent company of D-Securities.
and therefore existing employees cannot FB opposed the motion on the grounds that it is
automatically be considered separated. (BAR a separate entity and that it was never made
2012) party to the case. The RTC granted the motion
and issued the Alias Writ of Execution. In its
Resolution, the RTC relied on the following
9. X owns 99% of the capital stock of SSS facts: 499,995 out of the 500,000 outstanding
Corporation. X also own 99% of TTT shares of stocks of D-Securities are owned by
Corporation. SSS Corporation obtained a loan FB; FB had actual knowledge of the subject
from VVV Banks. On due date, SSS Corporate matter of litigation as the lawyers who
defaulted. TTT Corporation is financially represented D-Securities are also the lawyers of
healthy. Which statement is most accurate? FB. As an alter ego, there is no need for a
finding of fraud or illegality before the doctrine
of piercing the veil of corporate fiction can be
a) X being a controlling owner of SSS applied. The RTC ratiocinated that being one
Corporation can automatically be held and the same entity in the eyes of the law, the
personally liable for the loan of SSS service of summons upon DSecurities has
Corporation; b) TTT Corporation, owned by 99% bestowed jurisdiction over both the parent and
by X, can automatically be held liable; c) SSS wholly-owned subsidiary. Is the RTC correct?
Corporation and TTT Corporation, although
both are owned by X, are 2 distinct corporations
with separate juridical personalities hence, the Answer: No, the RTC is not correct. The court
TTT Corporation cannot automatically be held must have first acquire jurisdiction over the
liable for the loan of SSS Corporation; d) The corporation(s) involved before its or their
principle of piercing the veil of corporation separate personalities are disregarded; and the
fiction can be applied in this case doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over
a cause of action duly commenced involving
Answer: b) SSS Corporation and TTT parties duly brought under the authority of the
Corporation, although both are owned by X, are court by way of service of summons or what
2 distinct corporations with separate juridical passes as such service. (BAR 2014)
personalities hence, the TTT Corporation cannot
automatically be held liable for the loan of SSS
Corporation. (BAR 2012) a. Liability for Torts and Crimes b. Recovery of
Moral Damages

1. In the complaint filed by XYZ Corporation, its

10. In an action for collection of a sum of President alleged that he suffered mental
money, the RTC of Makati City issued a decision anguish, fright, social humiliation, and serious
anxiety as a result of the tortuous acts of ABC stockholder, suffered mental anguish, fright,
Corporation. In it counterclaim, ABC social humiliation and serious anxiety as a result
Corporation claimed to have suffered moral of the tortuous acts of XYZ Corporation.
damages due to besmirched reputation or
goodwill. 1) May XYZ Corporation recover moral
damages based on the allegations in the In its counterclaim, XYZ Corporation claimed to
complaint? 2) May ABC Corporation recover have suffered moral damages due to
moral damages? Give reasons for your answer. besmirched reputation or goodwill as a result of
Luzon Trading Corporation’s complaint.

Answer: 1) No. A corporation is a legal entity

separate and distinct from its president. 2) Yes. a) May Luzon recover moral damages based on
ABC Corporation may recover moral damages. A the allegations in the complaint? b) May XYZ
corporation may have a good reputation which, Corporation recover moral damages?
if besmirched, is a ground for the award of
moral damages. (BAR 1978)
Answer: a) No. A corporation, being an artificial
person which has no feelings, emotions or
2. In a complaint for damages, Zebra senses, and which cannot experience physical
Corporation allege that its president, Anton suffering or mental anguish, is not entitled to
Molina, suffered mental anguish, social moral damages.
humiliation and serious anxiety as a result of
the tortuous acts of Omega Corporation. In its
answer with counterclaim, Omega Corporation b) Yes. When a juridical person has a good
alleged that it suffered besmirched reputation reputation that is debased, resulting in social
because of the unfounded suit of Zebra humiliation, moral damages may be awarded.
Corporation and accordingly claimed for the Moreover, goodwill can be considered an asset
award of moral damages. of the corporation. (BAR 1998)

a) May Omega Corporation recover moral 2. Doctrine of Piercing the Corporate Veil
damages on its counterclaim? Reasons.
1. What is the doctrine of “piercing the veil of
corporate entity?” Explain.
Answer: a) It depends. Omega may demand Answer: Under the doctrine of “piercing the veil
moral damages, if it has a good reputation of corporate entity”, the legal fiction that a
which is besmirched, because of the unfounded corporation is an entity with a juridical
suit of Zebra; and, if otherwise, it cannot. (BAR personality separate and distinct from its
1985) members or stockholders may be disregarded
and the corporation will be considered as a
mere association of persons, such that liability
3. In a complaint filed against XYZ Corporation, will attach directly to the officers and the
Luzon Trading Corporation allege that its stockholders. It is an equitable doctrine
President & General Manager, who is also a developed to address situations where the
separate corporate personality of a corporation a) May the employees of Tantalus Corporation
is abused or used for wrongful purposes. (BAR proceed against the Suceso Corporation to
2006 recover their unpaid claims? Discuss. b) What is
the doctrine of “piercing the veil of corporate
entity” and in what cases did the Supreme
a. Grounds for Application of Doctrine Court apply the said doctrine?

1. C, a Steel and Nail Co., Inc., owned by X had

financial obligations to its employees. C ceased
Answer: a) Yes. It is very obvious that Suceso
operation, and was immediately succeeded on
Corporation seeks the protective shield of a
the next day by, and all its assets were turned
corporate fiction whose veil could and should
over to, the E Steel Corporation, 90% of the
be pierced (piercing the veil of corporate
subscribed shares of which were also owned by
fiction), as it is deliberately and maliciously
X. May the E Steel Corporation be held liable for
designed to evade a financial obligation to
the financial obligation of the C Steel and Nail
employees; thus, when the notion of legal
Co. Inc. to its employees?
entity is used to justify wrong or protect fraud,
the law will merge the two corporations into
one.
Answer: Yes. E Steel Corporation may be held
liable for the financial obligation of the C Steel
and Nail Co., Inc. to its employees, under the
b) “Piercing the veil of corporate entity” means
rule of “piercing the veil of corporate fiction”. It
that a corporation may not generally be made
is very obvious that E Steel Corporation seeks
to answer for acts or liabilities of its
the protective shield of a corporate fiction
stockholders or members, or those of the legal
whose veil in the present case could, and
entities to which it may be connected, and vice
should, be pierced as it was deliberately
versa; but if this corporation is used as an alter
designed to evade the financial obligation of C
ego, dummy, business conduit or shield to
steel and Nail Co. Inc., to its employees.
commit any act of illegality, fraud or wrong, or
(Claparols v. Court of Industrial Relations, 65
to confuse legitimate issues, then it would be
SCCRA 613) (BAR 1978)
otherwise, and the corporate fiction will be
disregarded.

2. Tantalus Corporation, of which 97% of the

issued and outstanding shares of stock were
The Supreme Court applied the doctrine of
owned by Roger Mano, had financial obligations
“piercing the veil of corporate entity” in the
to its employees by way of unpaid wages and
following cases:
allowances. Tantalus Corporation was dissolved
by shortening its corporate life and all its assets
turned over to Suceso Corporation, of which
1) Where the corporation is used as dummy to
95% of the subscribed shares were held by
commit illegality, fraud, or wrong, or confuse
Roger Mano and his wife. Then Tantalus
legitimate issues by the stockholders of said
Corporation ceased to operate.
corporation; 2) Where the corporation is an
agency for a parent corporation to commit
illegality, fraud, or wrong, or confuse legitimate
issues; and 3) Where a person owned all, or without assets. Thereafter plaintiffs filed an
controls, the stocks of a corporation, and the action against its present and past stockholder
latter is used by him to commit illegality, fraud, “Y” Corporation which owned substantially all
or wrong, or confuse legitimate issues. (BAR of the stocks of “X” Corporation. The two
1985) corporations have the same board of directors
and “Y” Corporation financed the operations of
“X” Corporation. May “Y” Corporation be held
3. Mr. Pablo, a rich merchant in his early forties, liable for the debts of “X” Corporation? Why?
was a defendant in a lawsuit which could
subject him to substantial damages. A year
before the court rendered judgment, Mr. Pablo Answer: Yes, “Y” Corporation may be held liable
sought his lawyer’s advice on how to plan his for the debts of “X” Corporation. The doctrine
estate to avoid taxes. His lawyer suggested that of piercing the veil of corporate fiction applies
he should form a corporation with himself, his to this case. The two corporations have the
wife and his children (all students and still same board of directors and “Y” corporation
unemployed) as stockholders and then transfer owned substantially all of the stocks of “X”
all his assets and liabilities to this corporation. Corporation, which facts justify the conclusion
Mr. Pablo and the plaintiff sought to enforce that the latter is merely an extension of the
this judgment. The sheriff, however, could not personality of the former, and that the former
locate any property in the name of Mr. Pablo controls the policies of the latter. Added to this
and therefore returned the writ of execution is the fact that “Y” Corporation controls the
unsatisfied. What remedy, if any, is available to finances of “X” Corporation which is merely an
the plaintiff? adjunct, business conduit or alter-ego of “Y”
Corporation. (BAR 2001)

Answer: The plaintiff can avail himself of the

doctrine of piercing the veil of corporate fiction 5. How does one pierce the veil of corporate
which can be invoked when a corporation is fiction?
formed or used in avoiding a just obligation.
While it is true that a family corporation may be
organized to pursue an estate tax planning, Answer: The veil of corporate fiction may be
which is not per se illegal or unlawful, the pierced by proving the court that the notion of
factual settings, however, indicate the existence legal entity is being used to defeat public
of a lawsuit that could subject Mr. Pablo to a convenience, justify wrong, protect fraud, or
substantial amount of damages. It would thus defend a crime or the entity is just an
be difficult for Mr. Pablo to convincingly assert instrument or alter ego or adjunct of another
that the incorporation of the family corporation entity or person. (BAR 2004)
was intended merely as a case of “estate tax
planning”. (BAR 1991)
6. To what circumstances will the “piercing the
veil of corporate entity” apply?
4. Plaintiffs filed a collection action against “X”
Corporation. Upon execution of the court’s
decision, “X” Corporation was found to be
Answer: The doctrine of “piercing the veil of 8. Must all incorporators and directors be
corporate entity” will apply when the residents of the Philippines?
corporation’s separate juridical personality is
used:
Answer: No. Only a majority of the
incorporators and a majority of the directors
a) To defeat public convenience; b) To justify must be residents of the Philippines. (BAR 2006)
wrong, protect fraud, or defend crime; c) As a
shield to confuse the legitimate issues; d)
Where a corporation is the mere alter ego or 9. X is a Filipino immigrant residing in
business conduit of a person; or e) Where the Sacramento, California. Y is a Filipino residing
corporation is so organized and controlled and Quezon City. Z is a resident alien residing in
its affairs are so conducted as to make it merely Makati City. GGG Corporation is a domestic
an instrumentality, agency, conduit or adjunct corporation—40% owned by foreigners and
of another corporation. (BAR 2006) 60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign
b. Test in Determining Applicability
corporation registered with the Philippines SEC,
Page | 198 KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y.

G. Incorporation and Organization

a) Who can be incorporators? Who can be
1. Promoter subscribers? b) What are the differences
between an incorporator and a subscriber, if
a. Liability of Promoter b. Liability of there are any?
Corporation for Promoter’s Contracts

2. Number and Qualifications of Incorporators

Answer: a) X, Y, Z and T could all be
7. What is the minimum and maximum number incorporators and subscribers. Note, however,
of incorporators required to incorporate a stock that Section 10 of the Corporation Code
corporation? Is this also the same minimum and requires that there must be at least 5 but not
maximum number of directors in a stock more than 15 incorporators (who must all be
corporation? natural persons) and that a majority of the
incorporators must be residents of the
Philippines. S, being a minor, could neither be
Answer: To incorporate a stock corporation, a an incorporator nor a subscriber. GGG
minimum of 5 and a maximum of 15 Corporation, CCC Corporation, and KKK
incorporators are required. Yes, the same Corporation could not be incorporators as they
minimum and maximum number of directors is are not natural persons. However, they could
required in a stock corporation. (BAR 2006) be subscribers.
b) Some of the differences are as follows: first, certifying under oath, among others, that the
all the incorporators are required to sign and total subscription paid is:
acknowledge the Articles of Incorporation while
the subscribers, as such, are not subject to the
same requirement; second, the incorporators a. Not less than P25,000.00 b. Not more than
are all required to be natural persons while the P5,000.00 c. Not less than P5,000,00 d. Not
subscribers could either be natural or juridical more than P25,000.00
persons; and third, the number of incorporators
cannot exceed 15 while the number of
subscribers could be more than 15 (subject to Answer: b. Not less than P5,000,00 (BAR 2011)
compliance, in the appropriate cases, with the
requirements of the SRC). (BAR 2012)
a. Nature and Function of Articles

3. Corporate Name — Limitations on Use of 1. Triple A Corporation (Triple A) was

Corporate Name incorporated in 1960, with 500 founder’s shares
and 78 common shares as its initial capital stock
1. A, the proprietor of a fleet of 10 taxicabs, subscription. However, Triple A registered its
decides to adopt, as his business name, “A stock and transfer books only in 1978, and
Transport Co., Inc.” May this be allowed? recorded merely 33 common shares as the
corporation’s issued and outstanding shares.

a. No, it would be deceptive since he is a

proprietor, not a corporation. In 1982, Juancho, the sole heir of one of the
Page | 199 original incorporators filed a petition with the
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
b. No, since “A” is a generic name, not suitable
the Articles of Incorporation indicating the
for registration. c. Yes, since his line of business
incorporators’ initial capital stock subscription.
is public transportation. d. Yes, since such name
Will the petition be granted? Why or why not?
would give his business a corporate identity.

Answer: Yes. The articles of incorporation defins

Answer: a. No, it would be deceptive since he is
the charter of the corporation and the
a proprietor, not a corporation. (BAR 2011)
contractual relationship between the State and
the corporation, the State and the stockholders,
and between the corporation and the
4. Corporate Term 5. Minimum Capital Stock
stockholders. Its contents are thus binding upon
and Subscription Requirements 6. Articles of
both the corporation and the stockholders,
Incorporation
conferring on Juancho a clear right to have his
1. The Articles of Incorporation must be stockholding recorded. (BAR 2009)
accompanied by a Treasurer’s Affidavit
b. Contents stock of the corporation is One Million Pesos
(P1,000.00), Philippine Currency.”
1. M Corporation is a Philippine Corporation
engaged in deep sea fishing. Its operation
resulted in losses. Because of the unprofitable
What are your comments and suggested
operations in deep sea fishing, the Corporation
changes to the proposed articles?
wants to engage in general construction
business, one of its secondary purposes.

Answer: a) On the First Article, I would suggest

that the corporate name indicate the fact of
Discuss briefly how the corporation may validly
incorporation by using either “Toho Marketing
engage in the construction business.
Corporation” or “Toho Marketing Company,
Incorporated”.

Answer:

In order that M Corporation may validly engage b) The Third Article should indicate the City or
in the construction business and thereby invest the Municipality and the Province in the
its funds therein the following requisites must Philippines, and not merely the region or as its
be complied with, to wit: Board of Directors may later designate, to be its
place of principal office.

There must be a meeting called for the purpose,

notice of which shall be given to all of the c) The Seventh Article must additionally point
stockholders on record whether or not they out the number of shares into which the capital
shall be entitled to vote thereat. In said meeting stock is divided, as well as the par value thereof
the board of directors of the corporation must or a statement that said stock or a portion
be authorized to engage in such business in a thereof are without par value. (BAR 1990)
resolution by the affirmative vote of
stockholders holding shares in the corporation
entitling them to exercise at least 2/3 of the c. Amendment
voting power on such a proposal at the said
stockholder’s meeting. (BAR 1977) 1. Guetze and his wife have 3 chidren: Neymar,
25, who is now based in Rio de Janeiro, Brazil;
Muelter, 23, who has migrated to Munich,
Germany; and James, 21, who resides in
2. The articles of incorporation to be registered
Bogota, Colombia. Neymar and Muelter have
in the SEC contained the following provisions—
since renounced their Philippine citizenship in
favor of their country of residence. Nearing 70
years old, Guetze decided to incorporate his
a) “First Article. The name of the corporation
business in Binondo, Manila. He asked his wife
shall be Toho Marketing Company.” b) “Third
and 3 children to act as incorporators with 1
Article. The principal office of the corporation
share of stock each, while he owned 999,996
shall be located in Region III, in such
shares of the 1,000,000 shares of the capital
municipality therein as its Board of Directors
stock.
may designate.” c) “Seventh Article. The capital
 it has yet no juridical personality in order to
have the power to sue or be sued in any court.
Assuming the corporation has been properly
(Hall v. Picio, 86 Phil. 603) (BAR 1978)
registered, may the Articles of Incorporation
now be amended to reduce the number of
directors to two—Guetze and his wife—to
2. You have been asked to incorporate a new
reflect the real owners of the shares of stock?
company to be called FSB Savings & Mortgage
Bank, Inc. List the documents that you must
submit to the SEC to obtain a certificate of
Answer: No, the Articles of Incorporation may
incorporation for FSB Savings & Mortgage Bank,
not be amended to reduce the number of
Inc.
directors to two. Section 14 of the Corporation
Code requires that the Articles of Incorporation
shall contain the number of directors, which
Answer: The documents to be submitted to the
shall not be less than 5 nor more than 15.
SEC to incorporate a new company to be called
Hence, the reduction of the number of directors
FSB Savings & Mortgage Bank, Inc., to obtain
to two, to reflect the real owners of the shares
the certificate of incorporation for said
of stock, is not valid (BAR 2014)
company, are:

d. Non-Amenable Items
1) Articles of Incorporation;

2) Treasurer’s affidavit;
7. Registration and Issuance of Certificate of
3) Certificate of Authority from the Monetary
Incorporation
Board of the BSP;
1. While the incorporation papers of XYZ, Inc.
4) Verification slip from the records of the SEC
were pending before the SEC for approval, A,
whether or not the proposed name has already
the designated Treasurer in the Articles of
been adopted by another corporation,
Incorporation held real estate property worth
partnership or association;
P20,000 which E turned over for shares he (E)
purchased in XYZ Inc. Before the certificate of 5) Letter undertaking to change the proposed
incorporation for XYZ, Inc could be issued, H, name if already adopted by another
who claims to be the owner of said real estate corporation, partnership or association;
property, filed an action against XYZ, Inc. for
recovery of possession of the same. 6) Bank certificate of deposit concerning the
paid-up capital;

7) Letter authorizing the SEC or Monetary Board

Will H suit prosper? Why? or its duly authorized representative to examine
the bank records regarding the deposit of the
paid-up capital;
Answer: No. H’s suit will not prosper. Since the
8) Registration sheet.
incorporation papers of XYZ, Inc. were still
pending before the SEC for approval, said XYZ
Inc. has not yet been registered, and, therefore,
3. A corporation organized under the Answer: Yes, the SEC should accept the Articles
Corporation Code commences to have of Incorporation. If the Articles of Incorporation
corporate existence and juridical personality substantially comply with the statute and all
and is deemed incorporated: other requirements are met, the SEC has no
discretion, but may be compelled by mandamus
to file them. The discretion exercised by SEC
a. From the date the application for does not extend to the merits of an application
incorporation is filed with the SEC. b. From the for incorporation, although it may be exercised
date the SEC issues a certificate of incorporation as to matters of form. (BAR 2014)
under its official seal. c. 30 days after the date
the application for incorporation is filed with
the SEC. d. 30 days after the date the SEC issues 8. Adoption of By-Laws
a certificate of incorporation under its official
a. Nature and Functions of By-Laws b.
seal.
Requisites of Valid By-Laws

1. The proposed Amended By-laws of CXT Inc., a

Answer: b. From the date the SEC issues a corporation listed in the Makati Stock Exchange,
certificate of incorporation under its official contain the following provisions:
seal. (BAR 2014)

a) That the holders of a majority of the

4. Guetze and his wife have 3 chidren: Neymar, outstanding capital stock may elect all the
25, who is now based in Rio de Janeiro, Brazil; members of the Board of Directors; b) That no
Muelter, 23, who has migrated to Munich, officer of the corporation shall be required to
Germany; and James, 21, who resides in be a stockholder; c) That the directors’ bonuses
Bogota, Colombia. Neymar and Muelter have shall be equivalent to 10% of gross revenues in
since renounced their Philippine citizenship in any given year; d) That a candidate for director
favor of their country of residence. Nearing 70 must own at least 1,000 shares; e) That
years old, Guetze decided to incorporate his meetings of the Board of Directors need not be
business in Binondo, Manila. He asked his wife held in the principal office and may even be
and 3 children to act as incorporators with 1 held outside the country.
share of stock each, while he owned 999,996
shares of the 1,000,000 shares of the capital
stock. As Corporate Secretary of CXT, you are asked to
comment on the validity of the above proposed
amendments.
Page | 202

Answer: As Corporate Secretary of CXT, I would

Assuming all other requirements are met, give the following comments on the question of
should the SEC accept or reject the Articles of validity of the various proposed amendments to
Incorporation? Why? the By-laws, as follows:
a) The minority stockholders may not be with “X’s” claims and where necessary for the
deprived of their right to vote in electing the development and operation of “X’s” mining
members of the board of directors; hence, the properties.
proposed amendment would be invalid.

Is the by-law provision valid?

b) The President should be a director who
should thus own at least one share of stock.
Therefore, the suggested amendment would be Answer: No. it is in violation of Section 32 of the
invalid unless the President is excluded from Corporation Code. (BAR 2001)
the proposed amendment.

c. Binding Effects d. Amendment or Revision

c) The director’s bonuses (total compensation)
cannot exceed 10% of net income; accordingly, 1. The Board of Directors of X Corporation,
the proposed amendment fixing the directors’ acting on a standing authority of the
bonuses to 10% of gross venues in any given stockholders to amend the by-laws, amended
year would be invalid. its by-laws so as to disqualify any of its
stockholders who is also a stockholder and
director of a competitor from being elected to
its Board of Directors.
d) While the By-laws may provide additional
qualifications for directors such qualifications
must not be unreasonable. A qualification
requiring a director to own at least 1,000 Y, a stockholder holding sufficient shares to
shares, in my view, would be unreasonable and assure him of a seat in the Board, filed a
a denial of the right of representation by the petition with the SEC for a declaration of nullity
minority shareholders in the Board of Directors. of the amended by-laws. He alleged among
other things that as a stockholder, he had
acquired rights inherent in stock ownership
such as the right to vote and be voted upon in
e) The meetings of the Board of Directors,
the election of directors. Is the stockholder’s
unlike those of the stockholders, may be held
petition tenable?
outside the Philippines; accordingly, the
proposed amendment to the by-laws on the
matter can be valid. (BAR 1987)
Answer: No. There is no vested right of a
stockholder to be elected as director. When a
person buys stock in a corporation he does so
with the knowledge that its affairs are
2. Suppose that the by-laws of “X” Corporation, dominated by a majority of the stockholders. To
a mining firm, provides that “The directors shall this extent, the stockholder parted with his
be relieved from all liability for any contract personal right to regulate the disposition of his
entered into by the corporation with any firm in property which he invested in the capital stock
which the directors may be interested.” Thus, of the corporation and surrendered it to the will
director “A” acquired claims which overlapped
of the majority of his fellow incorporators or is not inconsistent with the Corporation Code.
stockholders. (BAR 2000)

Corporations have the power to make by-laws 3. Is a by-law provision of “X” Corporation
declaring a person employed in the service of a “rendering ineligible or if elected, subject to
rival company to be ineligible for the removal, a director if he is also a director in a
Corporation’s Board of Directors. An corporation whose business is in competition
amendment which renders a director ineligible, with or is antagonistic to said corporation” valid
or if elected, subjects him to removal, if he is and legal? State your reason.
also a director in a corporation whose business
is in competition with or is antagonistic to the
other corporation, is valid. (BAR 1998) Answer:

Page | 204
2. At the annual stockholders’ meeting of MS
Corporation, the stockholders unanimously
passed a resolution authorizing the Board of Yes, the by-law provision is valid. It is the right
Directors to amend the corporate by-laws so as of a corporation to protect itself against
to disqualify any stockholder who is also a possible harm and prejudice that may be
director or stockholder of a competing business caused by its competitors. The position of
from being elected to the Board of Directors of director is highly sensitive and confidential. To
MS Corporation. The by-laws were accordingly say the least, to allow a person, who is a
amended. GK, a stockholder of MS Corporation director in a corporation whose business is in
and a majority stockholder of a competitor, competition with or is antagonistic to “X”
sought election to the Board of Directors of MS Corporation, to become also a director in “X”
Corporation. His nomination was denied on the Corporation would be harboring a conflict of
ground that he was ineligible to run for the interest which is harmful to the latter. (BAR
position. Seeking a nullification of the offending 2001)
disqualification provision, GK consults you
about its validity under the Corporation Code of
the Philippines. What would your legal advice 4. In a special meeting called for the purpose,
be? 2/3 of the stockholders representing the
outstanding capital stock in X Co. authorized the
company’s Board of Directors to amend its By-
Answer: The provision in the amended by-laws, laws. By majority vote, the Board then
disqualifying any stockholder who is also a approved the amendment. Is the amendment
director or stockholder of a competing business valid?
from being elected to the Board of Directors of
MS Corporation, is valid. The corporation is
empowered to adopt a code of by-laws for its a. No, since the stockholders cannot delegate
government not inconsistent with the their right to amend the By-laws to the Board.
Corporation Code. Such disqualifying provision b. Yes, since the majority votes in the Board was
sufficient to amend the By-laws. c. No, because,
the voting in the Board should have been by a 2. Which of the following corporate acts are
majority of a quorum. d. Yes, since the votes of valid, void, or voidable? Indicate your answer by
2/3 of the stockholders and majority of the writing the paragraph number of the query,
Board were secured. followed by your corresponding answer as
“valid”, “void” or “voidable”, as the case may
be. If your answer is “void”, explain your
Answer: a. No, since the stockholders cannot answer. In the case of a “voidable” answer,
delegate their right to amend the By-laws to the specify what conditions must be present or
Board. (BAR 2011) complied with to make the corporate act valid.

H. Corporate Powers XL Food Corporation guaranteed the loan of its

sister company XL Meat Products.
1. General Powers, Theory of General Capacity

1. Can a corporation validly change its corporate

name under its general power to amend its Answer: Void—This is an ultra vires act on the
articles of incorporation? part of XL Foods Corporation, and is not one of
the powers provided for in Sec. 36 of the
Corporation Code. (BAR 2002)
Does a change in the name of a corporation
result in its dissolution? Explain your answer.

Page | 205
Answer: Yes, a corporation may validly change
its name under its general power to amend its
articles of incorporation in accordance with
a. Enter into Contracts
Section 18 of the Corporation Law. Since there
is no restriction in said section relating to 1. AAA Corporation is a wholly owned
change of name, there is no reason why a subsidiary of BBB Corporation. To support the
corporation cannot change its name as long as business of AAA Corporation, BBB Corporation
it follows the procedure laid down by law. agreed to give its corporate guarantee to the
loan of AAA Corporation. What is required so
that the corporate guarantee will be valid?
The change in name does not result in its
dissolution, since there is no change in its being.
Just as a natural person does not cease to exist a) It only requires the approval of the Board of
due to change of name, so is the corporate Directors of BBB Corporation; b) The Articles of
existence not affected by a change in corporate Incorporation must provide such power and be
name. (BAR 1976) approved by the Board of Directors; c) Providing
corporate guarantee to another corporation is a
necessary exercise of power of a corporation; d)
It would require both the approval of the Board
of Directors and the stockholders on record.
 2. Specific Powers, Theory of Specific Capacity

Answer: a) It only requires the approval of the a. Power to Extend or Shorten Corporate Term
Board of Directors of BBB Corporation. (BAR
1. A group of stockholders of Sesame
2012)
Corporation filed a court suit against the
members of the Board of Directors to make
good to the shareholders, in proportion to their
shareholdings, the losses incurred by the
i. Doctrine of Apparent Authority corporation because of the defendant Board of
Directors’ management.

1. YKS Trading filed a complaint for specific

performance with damages against the PWC While the case was pending, the corporation
Corporation for failure to deliver cement was dissolved. During the 3-year period from its
ordered by plaintiff. In its answer, PWC denied dissolution, the Board of Directors decided to
liability on the ground, inter alia, that YKS has extend the corporate life by an amendment of
no personality to sue, not being incorporated, its Articles of Incorporation. Can the Board of
and that the President of PWC was not Directors do so? Reasons.
authorized to enter into a contract with plaintiff
by the PWC Board of Directors, hence the
contract is ultra vires. YKS Trading replied that it Answer: The Board of Directors may not do so.
is a sole proprietorship owned by YKS, and that The corporate life may be extended so long as
the President of PWC had made it appear in the proper steps therefore (charter
several letters presented in evidence that he amendment) are done by the corporation
had authority to sign contracts on behalf of the before its expiry date. (BAR 1988)
Board of Directors of PWC.

Page | 206
Will the suit prosper or not? Reason briefly.

2. The corporate term of a stock corporation is

Answer: Yes, the suit will prosper. As the sole that which is stated in its Articles of
proprietorship, the proprietor of YKS Trading Incorporation. It may be extended or shortened
has the capacity to act and the personality to by an amendment of the Articles when
sue PWC. It is not necessary for YKS Trading to approved by majority of its Board of Directors
be incorporated before it can sue. On the other and:
hand, PWC is stopped from asserting that its
President had no authority to enter into the
contract, considering that, in several of PWC’s a. Approved and ratified by at least 2/3 of all
letters, it had clothed its President with stockholders b. Approved by at least 2/3 of the
apparent authority to deal with YKS Trading. stockholders representing the outstanding
(BAR 2004) capital stock. c. Ratified by at least 2/3 of all
stockholders. d. Ratified by at least 2/3 of the
stockholders representing the outstanding
capital stock.
b. Power to Increase or Decrease Capital Stock
or Incur, Create, Increase Bonded
Indebtedness
Answer: d. Ratified by at least 2/3 of the
stockholders representing the outstanding 1. “X” Realty, Inc., a corporation engaged in the
capital stock. (BAR 2011) subdivision business, has an authorized capital
of P800,000, all of which has been fully
subscribed. At a special meeting of the board of
3. T Corp. has a corporate term of 20 years directors, the majority vote decided on the
under its Articles of Incorporation or from June basis of the recommendation of its Executive
1, 1980 to June 1, 2000. On June 1, 1991 it Committee, that the corporation purchase a 5-
amended its Articles of Incorporation to extend hectare property offered to it because it was
its life by 15 years from June 1, 1980 to June 1, ideal for its subdivision business, the price
2015. The SEC approved this amendment. On offered was lower than the prevailing market
June 1, 2011, however, T Corp. decided to price and John Roque, the owner of the
shorten its term by 1 year or until June 1, 2014. property, was willing to accept P200,000 worth
Both the 1991 and 2011 amendments were of shares of the corporation in exchange of, or
approved by majority vote of its Board of as payment for, his property. No cash was
Directors and ratified in a special meeting by its involved in the transaction. Thus, the board
stockholders representing at least 2/3 of its approved a resolution increasing the authorized
outstanding capital stock. The SEC, however, capital stock from P800,000 to 1 Million,
disapproved the 2011 amendment on the stipulating that the additional P200,000 worth
ground that it cannot be made earlier than 5 of shares be issued in exchange for the 5-
years prior to the expiration date of the hectare property and that the existing
corporate term, which is June 1, 2014. Is this stockholders would have pre-emptive right to
SEC disapproval correct? subscribe to the additional shares as the same
were being issued to pay for the property.

a. No, since the 5-year rule on amendment of

corporate term applies only to extension, not Was the action of the Board correct and
shortening, of term. b. Yes, any amendment sufficient?
affecting corporate term cannot be made
earlier than 5 years prior to the corporation’s
expiration date. c. No, since a corporation can in Answer: The action of the Board of Directors
fact have a corporate life of 50 years. d. Yes, the was correct, but not sufficient. The Corporation
amendment to shorten corporate term cannot Code requires that the resolution of the Board
be made earlier than 5 years prior to the of Directors shall still be approved by 2/3 of the
corporation’s expiration date. outstanding capital stock, and further to be
approved by the SEC, and there are no such
approvals. Furthermore, the pre-emptive rights
Answer: b. No, since the 5-year rule on of the stockholders to subscribe the additional
amendment of corporate term applies only to shares cannot be denied, except by Articles of
extension, not shortening, of term. (BAR 2011)
Incorporation. (Secs. 38 & 39, Corporation 3. The stockholders of People Power, Inc. (PPI)
Code) (BAR 1982) approved two resolutions in a special
stockholders’ meeting:

2. The stockholders of People Power, Inc. (PPI)

approved the following two resolutions in a a) Resolution increasing the authorized capital
special stockholder’s meeting: (i) Resolution stock of PPI; and b) Resolution authorizing the
increasing the authorized capital stock of PPI, Board of Directors to issue, for cash payment,
and (ii) Resolution authorizing the Board of the new shares from the proposed capital stock
Directors to issue for cash payment the new increase in favor of outside investors who are
shares from the proposed capital stock increase non-stockholders.
in favor of outside investors who are non-
stockholders. The foregoing resolutions were
approved by stockholders representing 99% of The foregoing resolutions were approved by
the total outstanding capital stock. The sole stockholders representing 99% of the total
dissenter was Jose Estrada who owned the rest outstanding capital stock. The sole dissenter
1% of the stock. was Jimmy Morato who owned 1% of the stock.

a) Are the resolutions binding on the Are the resolutions binding on the corporation
corporations and its stockholders, including and its stockholders including Jimmy Morato,
Estrada, the dissenting stockholder? b) What the dissenting stockholder?
remedies, if any, are available to Estrada?

Answer: No. the resolutions are not binding on

Answer: a) The board resolutions (i) increasing the corporation and its stockholders including
the authorized capital stock of PPI, and (ii) Jimmy. While these resolutions were approved
authorizing the Board to issue new shares from by the stockholders, the directors’ approval,
that increase of capital stock in favor of outside which is required by law in such case, does not
investors is binding on the stockholders since exist. (BAR 1998)
the said resolutions were approved by the
stockholders representing at least 2/3 of the
total outstanding capital stock.

4. Suppose “X” Corporation has an authorized

b) Estrada, the dissenting stockholder, may avail capital stock of P1 M divided into 100,000
himself of the appraisal rights by claiming that shares of stock with par value of P10 each.
since the resolutions appear to favor outside
investors, as against incumbent stockholders,
on the increase in capital stock, he may demand a) Give two ways whereby said authorized
the payment of the appraised value of his capital stock may be increased to about P1.5 M.
shares. (BAR 1987) b) Give three practical reasons for a corporation
to increase its capital stock.
Answer: a) Two ways of increasing the
Authorized Capital Stock of “X” Corporation to
6. If ABC Corporation will increase its authorized
P1.5 M are: 1. Increase the number of shares
capital stock, the Corporation Code requires—
from 100,000 to 150,000 shares with the same
par value of P10 each.

2. Increase par value of the 1000,000 shares to a) The approval of the majority of the Board of
P15 each. Directors only; b) The approval of the majority
of the stockholders and the Board of Directors;
c) The approval of 2/3 of the shareholders of
b) Three practical reasons for a corporation to the outstanding capital stock as well as the
increase its capital stock are: 1. To generate approval of the SEC; d) The approval of the
more working capital; 2. To have more shares majority of the Board of Directors and approval
with which to pay for the acquisition of more of the shareholders holding 2/3 share of the
assets like acquisition of company car, stocks, outstanding capital stock.
house, machinery or business; and 3. To have
extra share with which to cover or meet the
requirement for declaration of stock dividend. Answer: Examinees should be given full credit
(BAR 2001) for whatever answer they gave as the question
is vague. (BAR 2012)

5. Distinguish clearly (1) crossed checks from

cancelled checks; and (2) cash bond from surety c. Power to Deny Pre-Emptive Rights
bond.
1. ABC Corp. increased its capital stocks from
P10 M to P15 M and, in the process, issued
1,000 new shares divided into Common Shares
Answer: A crossed check is one with two
“B” and common shares “C”. T, a stockholder
parallel lines drawn diagonally across its face or
owning 500 shares, insists on buying the newly
across a corner thereof. On the other hand, a
issued shares through a right of pre-emption.
cancelled check is one marked or stamped
The company claims, however, that its By-laws
“paid” and/or “cancelled” by or on behalf of a
deny T any right of pre-emption. Is the
drawee bank to indicate payment thereof.
corporation correct?

A surety bond is issued by a surety or insurance

a. No, since the by-laws cannot deny a
company in favor of a designated beneficiary,
shareholder his right of pre-emption. b. Yes, but
pursuant to which such company acts as a
the denial of his pre-emptive right extends only
surety to the debtor or obligor of such
to 500 shares. c. Yes, since the denial of the
beneficiary.
right under the By-laws is binding on T. d. No,
since pre-emptive rights are governed by the
articles of incorporation.
A cash bond is a security in the form of cash
established by a guarantor or surety to secure
the obligation of another. (BAR 2004)
Answer: c. No, since the by-laws cannot deny a fraudulent and therefore null and void,
shareholder his right of pre-emption. (BAR contending that it learned of the sale only from
2011) the column of Leticia Locsin at the Daily Globe.

a) Is Acme Bottlers, Inc. correct in alleging that

the said sale is null and void? b) What are the
d. Power to Sell or Dispose of Corporate Assets
rights and liabilities of Victory Corporation?
Page | 209

Answer: a) No, the allegation of Acme that the

1. The Board of Directors of “X” Corporation, sale is null and void cannot be sustained. The
with the unanimous authority and approval of Corporation Code expressly authorizes
its stockholders in a meeting called for the corporations to sell all or substantially all of its
purpose, sells to “Y” Corporation for P10M, assets under the conditions therein expressed
substantially all of the corporation’s assets which had been complied with according to the
consisting of pieces of machinery, fixtures and facts stated in the problem. The Bulk Sales Law,
equipment used in the business of said upon the other hand, cannot successfully be
corporation. “Z” a creditor, now questions the invoked as the legal basis for the nullity of the
sale as fraudulent, and therefore, null and void. sale as the Act applies only to the conveyance in
bulk of stocks in trade. Had the law been
applicable, notice to the creditors before the
Answer: Assuming that X Corporation was sale would have been required under the Bulk
engaged in retail business, and therefore the Sales Law for its validity.
Bulk Sales Law is applicable, Z, a creditor may
question the sale as fraudulent because X
Corporation (1) did not make detailed inventory b) Victory has acquired rights as lawful buyer in
of what would be sold and give notice thereof the sale of Union’s corporate assets. If, as
to creditors, and (2) did not deliver a sworn alleged by Acme, the sale is fraudulent and it is
statement of the names and addresses of all rescinded on that ground, the rescission would
creditors to X Corporation, pursuant to law only be to the extent that there is prejudice to
(BAR 1980) the creditors. Assuming further, that the
rescission, in fact, takes place, Victory
Corporation may go after the seller for breach
2. The Board of Directors of Union Corporation, of sale or warranty as the ultimate facts would
with the unanimous authority of its warrant. (BAR 1988)
stockholders in a meeting duly called for the
purpose, sold to Victory Corporation for P880
Million substantially all of the company’s assets 3. E Corporation sold its assets to M, Inc. after
consisting of pieces of machinery, fixtures, and complying with the requirements of the Bulk
equipment used in the alcoholic beverage Sales Law. Subsequently, one of the creditors of
business of the company. Acme Bottlers, Inc., E Corporation tried to collect the amount due it,
creditor-supplier of the bottle requirements of but found out that E Corporation had no more
Union Corporation, now questions the sale as assets left. The creditor then sued M, Inc. on
the theory that M, Inc. is a mere alter ego of E c) How would you protect the interest of the
Corporation. creditors of Divine Corporation?

d) In case Divine Corporation violated the law,

what remedies are available to Top Grade
Will the suit prosper? Explain.
Fashion Corporation?

Answer: The suit will not prosper. The sale by E

Answer: a) The sale is a sale in bulk, because it
Corporation of its assets to M, Inc. does not
is a sale of all or substantially all of the fixtures
result in the transfer of the liabilities of the
used in and about the business of the vendor, a
latter to, nor in the assumption thereof by the
garments manufacturer.
former. The facts given do not indicate that
such transfer or assumption took place or was
stipulated upon by the parties in their
b) Divine Corporation can sell the aforesaid
agreement. Furthermore, the sale by E
items to Top Grade Fashion Corporation. But it
Corporation of its assets is a sale of its property.
must secure the approval of at least 2/3 of its
It does not involve the sale of the shares of
stockholders and a majority vote of the
stock of the corporation belonging to its
members of its board of directors as this is a
stockholder. There is, therefore, no merger or
sale of all or substantially all of its assets.
consolidation that took place. E Corporation
continues to exist and remains liable to the
creditor. (BAR 1996)
c) To protect the interest of the creditors, I will
4. Divine Corporation is engaged in the require the seller to prepare an affidavit stating
manufacture of garments for export. In the the names of all its creditors, their addresses,
course of its business, it was able to obtain the amount of their credits and their respective
loans from individuals and financing maturities, and to submit the affidavit to the
institutions. However, due to the drop in the buyer who, in turn, should notify the creditors
demand for garments in the international about the transaction he is about to conclude
market, Divine Corporation could not meet its with the seller.
obligations. It decided to sell all its equipment
such as sewing machines, perma-press
machines, high speed sewers, cutting tables, If the transaction was made to defraud the
ironing tables, etc., as well as it supplies and creditors, the latter may have the contract
materials to Top Grade Fashion Corporation, its rescinded. The creditors may also file a petition
competitor. for involuntary insolvency and have the sale
voided if it was made in fraud of creditors.

a) How would you classify the transaction?

b) Can Divine Corporation sell the aforesaid d) Top Grade Fashion Corporation may recover
items to Top Grade Fashion Corporation? What the amount paid if the sale was made in fraud
are the requirements to the validly sell the of creditors and sue for damages. (BAR 2005)
items? Explain.
e. Power to Acquire Own Shares

1. B, an alien commercial bank doing business in Under what condition is a stock corporation
the Philippines was paid by a Filipino debtor, C, empowered to acquire its own shares?
who had no other assets, with a piece of land
located in Bulacan. In the meantime that there
were no buyers yet of the land, B sought to Answer: A stock corporation may only acquire
have the land registered in its name by the its own shares of stock if the trust fund doctrine
Register of Deeds of Bulacan. But the Register is not impaired. This is to say, for instance, that
of Deeds refused to register it on the ground it may purchase its own shares of stock by
that the said bank, B, is alien owned and utilizing merely its surplus profits over and
therefore the transfer violates the above the subscribed capital of the corporation.
constitutional prohibition of alien holding of (BAR 1992)
private agricultural land. The bank, B, contends
that Republic Act 337, the General Banking Act,
in section 25(c) authorizes commercial banks to 3. Under what conditions may a stock
purchase and hold real estate as shall be corporation acquire its own shares?
conveyed to it in satisfaction of debts previously
contracted in the course of its dealings. Decide
the dispute with reasons. Answer: The conditions under which a stock
corporation can acquire its own share are as
follows:
Answer: Yes, the Register of Deeds may legally
refuse to register the land in question in the
name of B, an alien commercial bank, due to a. That it be for a legitimate and proper
constitutional provision that the disposition, corporate purpose; and b. That there shall be
exploitation or utilization of any of the natural unrestricted retained earnings to purchase the
resources of the Philippines, or to corporations same and its capital is not thereby impaired.
or associations at least 60% of the capital of (BAR 2003)
which is owned by such citizens. (Sec. 9, Art.
XIV, Constitution of the Philippines.) (BAR 1979)
4. ABC Holdings Company, a Hong Kong
company, owns 10% of XYZ Bank. Because of
Page | 211 the peace and order situation in the Philippines,
ABC Holding Company wanted to sell its
shareholdings in XYZ Bank. Unfortunately,
2. A corporation executed a promissory note nobody is interested to buy a 10%
binding itself to pay its President/ Director, who shareholdings in a bank. The board of directors
had tendered his resignation, a certain sum in of XYZ Bank thought that it would be a good
payment of the latter’s shares and interests in idea to buy back the shares owned by ABC
the company. The corporation defaulted in Holding Company. Which statement is most
paying the full amount so that the said former accurate?
President filed suit for collection of the balance
before the SEC.
a) Buying back the shares by XYZ Bank is stockholder’s meeting would entail too much
absolutely not allowed; b) Buying back the expenses.
shares may be allowed provided it is with the
approval of the Monetary Board and disposed
of within 6 months; c) Buying back the shares M thus cannot have the opportunity to exercise
may be allowed provided such shares will be his appraisal right. He wants to sue the board to
disposed of within 10 years; d) Buying back the compel it to submit the matter to the
shares may be done anytime provided the stockholders and to enjoin it from pursuing the
Board of Directors will approve the same. project until the stockholders shall have
approved it.

Answer: b) Buying back the shares may be

allowed provided it is with the approval of the a) Do you think the matter needs the
Monetary Board and disposed of within 6 stockholders’ approval or is the action of the
months. (BAR 2012) Board of Directors sufficient? Explain.

f. Power to Invest Corporate Funds in Another Answer: a) No, it does not need the approval of
Corporation or Business the stockholders. Under the Corporation Code,
a corporation may, as a general rule, invest its
1. ABC Corporation is engaged in the business of
funds in another business or in any purpose
manufacturing soft drinks. For the past 10
other than the primary purpose for which it was
years, it has bought all its bottles from XYZ
organized, when approved by the Board of
Corporation. Considering the volume of its
Directors and by 2/3 of the outstanding capital
production, it now finds that it will be more
stock in a meeting called for the purpose. Any
economical to manufacture its own bottles.
dissenting stockholder shall have the appraisal
right. However, the same provision makes an
exception: where the investment is reasonably
The Board of Directors, after studying and
necessary to accomplish its primary purpose,
discussing the matter thoroughly, decides to set
the approval of the stockholders is not
aside the amount of 1 Million for this project.
necessary. In the case at hand, the manufacture
Most of this amount will go to the cost of
of bottles is reasonably necessary for the
equipment and materials.
corporation’s primary business of
manufacturing soft drinks and does not
therefore need the approval of the
M is a stockholder of ABC Corporation and is stockholders. The action of the board is
against this investment in the bottling project sufficient. (De l Rama v. Maao Sugar Central, GR
and would like to withdraw from the 17504, Feb. 28, 1969) (BAR 1983)
corporation by exercising his appraisal right if
the project goes through. He therefore
demands that the project be submitted to the
2. Stikki Cement Corporation (STIKKI) was
stockholders for approval, but the board refuses
organized primarily for cement manufacturing.
to do so on the ground that there is no need for
Anticipating substantial profits, its President
such approval and that the calling of a special
proposed that STIKKI invest in (a) a power plant
project, (b) a concrete road project, and (c) b) The procedure in securing the approval of
quarry operations for limestone used in the the stockholders is as follows:
manufacture of cement.

i) Written notice of the proposed investment

1. What corporate approvals or votes are and the time and place of the stockholders’
needed for the proposed investments? Explain. meeting should be sent to each stockholder at
2. Describe the procedure in securing these his place of residence as shown on the books of
approvals. the corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally.
Answer: 1. Unless the power plant and the
Page | 213
concrete road project are reasonably necessary
to the manufacture of cement by STIKKI (and
they do not appear to be so), then the approval
ii) At the meeting, each of the projects should
of the said projects by a majority of the Board
be approved by the stockholders representing
of Directors and the ratification of such
at least 2/3 of the outstanding capital stock.
approval by the stockholders representing at
(BAR 1995)
least 2/3 of the outstanding capital stock would
be necessary.

As for the quarry operations for limestone, the 3. May a corporation enter into a joint venture?
same is an indispensable ingredient in the
manufacture of cement and may, therefore, be
considered reasonably necessary to accomplish Answer: A corporation may enter into a joint
the primary purpose of STIKKI. In such case, venture. However, inasmuch as the term joint
only the approval of the Board of Directors venture has no precise legal definition, it may
would be necessary. take various forms. It could take the form of a
simple pooling of resources (not involving
incorporation) between 2 or more corporations
2. a) The procedure in securing the approval of for a specific project, purpose or undertaking,
the Board of Directors is as follows: or for a limited time. It may involve the creation
of a more formal structure and, hence, the
formation of a corporation. If the joint venture
i) A notice of meeting of the Board should be would involve the creation of a partnership, as
sent to all the directors. The notice should state the term is understood under the Civil Code,
the purpose of the meeting. ii) At the meeting, then a corporation cannot be a party to it. (BAR
each of the project should be approved by a 1996)
majority of the Board (not merely a majority of
those present at the meeting).
4. When may a corporation invest its funds in
another corporation or business or for any
other purposes?
 b) The aforesaid approval of the Board of
Directors for the declaration of stock dividends
Answer: A corporation may invest its funds in
shall still be approved by the stockholders
another corporation or business or for any
representing not less than 2/3 of the
purpose other than the primary purpose for
outstanding capital stock, at a regular or special
which it was organized when the said
meeting called for the purpose. In addition,
investment is approved by a majority of the
there must be the increase of the authorized
Board of Directors and such approval is ratified
capital stock at least to accommodate the stock
by the stockholders representing at least 2/3 of
dividends, to be approved by the SEC, inasmuch
the outstanding capital. Written notice of the
as the authorized capital stock of Palmavera
proposed investment and the date, time and
Corporation was fully subscribed already. (Secs.
place of the stockholders’ meeting at which
38 & 43, Corporation Code) (BAR 1982)
such proposal will be taken up must be sent to
each stockholder. (BAR 1996)

2. On December 9, 1985, Matatag Corporation

revalued its assets. On the basis of the
g. Power to Declare Dividends
reappraisal, the Board of Directors also declared
1. Palmavera Corporation has an authorized cash dividends for all stockholders. On
capital stock of P500,000, all subscribed and December 16, 1985, Matatag Corporation
outstanding as of December 31, 1981. The amassed substantial profits in a highly lucrative
corporation also has an unrestricted retained transaction. Some minority stockholders,
earnings in its book amounting to P375,000. however, did not want to complicate their
Since the corporation needed the cash surplus income tax problems for 1985 and refused to
to carry out its expansion projects, the board of accept the cash dividends. They also filed suit to
directors, in its meeting held on January 5, compel the other stockholders to return to
1982, approved a resolution declaring and Matatag Corporation the money received as
ordering the issuance of 50% stock dividends in dividends. Not one of the stockholders who
lieu of cash dividends. formed the majority joined in the suit since they
were happy with the money they received.

a) Was the resolution declaring the issuance of

stock dividends valid? Explain your answer. b) a) Will the action prosper? Explain.
What step or steps need be taken in order that
the decision of the board could be
implemented? State the required vote. Answer: a) Two alternative answers are
suggested: i. The action will prosper. A cash
dividend based on re-appraisal value is
Answer: a) Yes, the resolution of the Board of improper. Dividends may only be declared from
Directors declaring the issuance of stock surplus profit from operations.
dividends was valid, but still insufficient for
purposes of stock dividend. (Sec. 43,
Corporation Code) ii. The action will not prosper. The fact that,
shortly after the declaration of cash dividends,
the corporation had earned substantial profits
(assuming that the amount thereof would be (2) After 1 year of operation, Safe Realty, Inc.,
sufficient to cover the dividend declaration) wanted to declare dividends to its stockholders.
during the same month would be sufficient to Ramos, its President, asked Santos, its
cure the defect. A violation of the trust fund Treasurer, whether this feasible, considering
doctrine, which is the rationale of the legal the financial standing of the corporation. Santos
requirement on dividend declaration, is not void reported that the corporation posted a P1 M
per se and it is, therefore, susceptible to profit and its real estate has appreciated in
curative events in ultimate results. (BAR 1986) value to the tune of P4 M. The Board then
declared dividends to its stockholders
computed on the basis of P5 M representing
3. Taurus Corporation (TC) commenced profits and appreciation in value of its real
operation in 1985. During that year TC’s loss estate. Is the dividend declaration proper?
from operations amounted to P500,000. In Reasons.
1986, TC recouped all its losses in 1985,
registering a net after tax profit of P500,000. In
the same year, the management of the Answer: 1) Dividends may either be cash
company discovered that a parcel of land (property) or stock. Any dividend other than
originally acquired in 1985 for P300,000 had at from the unissued shares of the corporation is,
least doubled in value and accordingly the in contemplation of law, a cash dividend. A
Board of Directors of TC, with the conformity of stock dividend is one that is declared and paid
the external auditors and backed up by a out from the unissued shares of corporation.
valuation report of a reputable appraiser, Declaration of stock dividends, unlike cash
recognized a revaluation or appraisal surplus of dividends, need the concurrence of the
P300,000. stockholders.

May the Board of Directors of TC declare a cash A declaration of dividends may be revoked if
dividend out of this surplus? Explain. the same was irregularly declared, such as when
the same is violative of the trust fund doctrine;
otherwise, it can no longer be revoked once the
Answer: The Board of Directors cannot declare right thereto has already vested in the
cash dividends out of the revaluation or stockholders.
appraisal surplus that may fluctuate from time
to time. Dividends can only be declared from
surplus profits arising from its operations. (BAR 2) The dividend declaration is improper.
1987) Dividends may be declared only out of
unrestricted retained earnings and, as
understood in generally accepted accounting
4. (1) Distinguish between cash dividend and principles, such declaration would preclude its
stock dividend. When may the declarations of being sourced from mere increments in the
these dividends be revoked? value of corporate assets which may fluctuate
from time to time. (BAR 1989)
5. At least 2/3 of the stockholders of Solar
Corporation, meeting upon the
Answer: I would not approve of a proposed
recommendation of the Board of Directors,
stipulation in the management contract that the
declared a 50% stock dividend during their
managing corporation, as an additional
annual meeting. The notice of the annual
compensation to it, should be entitled to 10% of
stockholders’ meeting did not mention anything
any stock dividend that may be declared.
about a stock dividend declaration. The matter
Stockholders are the only ones entitled to
was taken up only under the item “Other
receive stock dividends. I would add that the
Business” in the agenda of the meeting. C.K.
unsubscribed capital stock of a corporation may
Senwa, a stockholder, who received his copy of
only be issued for cash or property or for
the notice but did not attend the meeting,
services already rendered constituting a
subsequently learned about the 50% stock
demandable debt. As an alternative, I would
dividend declaration. He desires to have the
suggest that the managing corporation should
stock dividend declaration cancelled and set
instead be given a net profit participation and, if
aside, and wishes to retain your services as a
later so desires, to then convert the amount
lawyer for the purpose.
that may be due thereby to equity or shares of
stock at no less than the par value thereof. (BAR
1991)
Will you accept the case? Discuss with reasons.

7. During the annual stockholders meeting, Riza,

Answer: I will not accept the case. Section 43 of
a stockholder proposed to the body that a part
the Corporation Code states that no stock
of the corporation’s undeserved earned surplus
dividend shall be issued without the approval of
be capitalized and stock dividends be
the stockholders representing not less than 2/3
distributed to the stockholders, arguing that as
of the outstanding capital stock at a regular or
owners of the company, the stockholders, by
special meeting duly called for that purpose.
majority vote, can do anything. As chairman of
Conformably with Section 50 of the Corporation
the meeting, how would you rule on the motion
Code, a written notice of the holding of the
to declare stock dividends?
regular meeting sent to the shareholders will
suffice. The notice itself specifies the said
subject matter. (BAR 1990)
Answer: As the chairman of the meeting, I
would rule against the motion considering that
a declaration of stock dividends should initially
6. ABC Management, Inc. presented to DEF
be taken by the board of directors and
Mining Corp. the draft of its proposed
thereafter to be concurred in by a 2/3 vote of
Management Contract. As an incentive, ABC
the stockholders. There is no prohibition,
included in the terms of compensation that ABC
however, against the stockholders’ resolving to
would be entitled to 10% of any stock dividend
recommend to the board of directors that it
which DEF may declare during the lifetime of
consider a declaration of stock dividends for
the Management Contract. Would you approve
concurrence thereafter by the stockholders.
of such provision? If not, what would you
(BAR 1991)
suggest as an alternative?
8. For the past 3 years of its commercial writing the paragraph number of the query,
operation, “X”, an oil company, has been followed by your corresponding answer as
earning tremendously in excess of 100% of the “valid”, “void” or “voidable”, as the case may
corporation’s paid-in capital. All of the be. If your answer is “void”, explain your
stockholders have been claiming that they answer. In the case of a “voidable” answer,
share in the profits of the corporation by way of specify what conditions must be present or
dividends but the Board of Directors failed to lift complied with to make the corporate act valid.
its finger.

1) The board of directors of XL Food

Page | 216 Corporation declared and paid cash dividends
without approval of the stockholders.

a) Is Corporation “X” guilty of violating a law? If

in the affirmative, state the basis. b) Are there Answer: 1) Valid. (BAR 2002)
instances when a corporation shall not be liable
for not declaring dividends?
10. a) Under what circumstances may a
corporation declare dividends? b) Distinguish
Answer: a) Corporation “X” is guilty of violating dividend from profit; cash dividend from stock
Section 43 of the Corporation Code. This dividend. c) From what funds are cash and stock
provision prohibits stock corporations from dividends sourced? Explain why.
retaining surplus profits in excess of 100% of
their paid-in capital.
Answer: a) A corporation may declare dividends
if it has unrestricted retained earnings.
b) The instances when a corporation shall not
be held liable for not declaring dividends are: 1.
When justified by definite corporate expansion b) Profits belong to the corporation, while
projects or programs approved by the board of dividends belong to the stockholders when
directors; 2. When the corporation is prohibited dividend is declared.
under any loan agreement with any financial
institution or creditor, whether local or foreign,
from declaring dividends without its or his A cash dividend involves disbursement of
consent, and such consent has not yet been earnings to stockholders, while stock dividend
secured; or 3. When it can be clearly shown that does not involve any disbursement. A cash
such retention is necessary under special dividend affects the fractional interest in
circumstances obtaining in the corporation, property which each share represents, while a
such as when there is need for special reserve stock dividend decreases the fractional interest
for probable contingencies. (BAR 2001) in corporate property which each share
represents. A cash dividend does not increase
the legal capital, while a stock dividend does, as
9. Which of the following corporate acts are there is no cash outlay involved. Cash dividends
valid, void, or voidable? Indicate your answer by are subject to income tax, while stock dividends
are not. Declaration of stock dividend requires unless there are sufficient unrestricted retained
the approval of both the majority of the earnings. Otherwise, the corporation will be
members of the board of directors and at least forced to use its capital to make said payments
2/3 of the stockholders. In the declaration of in violation of the trust fund doctrine. Likewise,
cash dividend, the approval by a majority of the redemption of shares cannot be compelled.
members of the board of directors will suffice. While the certificate allows such redemption,
the option and discretion to do so are clearly
vested in the Corporation. (BAR 2009)
c) Both cash dividend and stock dividend may
be declared out of unrestricted retained
earnings. Paid-in surplus can be declared stock 12. TRUE OR FALSE. Answer TRUE if the
dividend but not cash dividend, because a stock statement is true, or FALSE if the statement is
dividend merely transfers the paid-in surplus to FALSE. Explain your answer in not more than 2
capital. (BAR 2005) sentences.

11. On September 15, 2007, XYZ Corporation Dividends on shares of stock can only be
issued to Paterno 800 preferred shares with the declared out of unrestricted retained earnings
following terms: of the corporation.

“The Preferred Shares shall have the following

rights, preferences, qualifications, and
Answer: True. Dividends on shares of stock of a
limitations, to wit:
corporation, whether cash dividend or stock
dividend, can be validly declared only out of
unrestricted retained earnings. It cannot be
1. The right to receive a quarterly dividend of
declared out of the capital. Otherwise, such
1% cumulative participating; 2. These shares
declaration of dividend will violate the trust
may be redeemed, by drawing of lots, at any
fund doctrine. (BAR 2009)
time after 2 years from date of issue, at the
option of the Corporation; x x x.”

13. The rule is that no stock dividend shall be

issued without the approval of stockholders
Today, Paterno sues XYZ Corporation for
representing at least 2/3 of the outstanding
specific performance, for the payment of
capital stock at a regular or special meeting
dividends on, and to compel the redemption of,
called for the purpose. As to other forms of
the preferred shares, under the terms and
dividends:
conditions provided in the stock certificates.
Will the suit prosper? Explain.

a. A mere majority of the entire Board of

Directors applies. b. A mere majority of the
Answer: No. the suit will not prosper. Paterno
quorum of the Board of Directors applies. c. A
cannot compel XYZ Corporation to pay
mere majority of the votes of stockholders
dividends, which have to be declared by the
representing the outstanding capital stock
Board of Directors and the latter cannot do so,
applies. d. The same rule of 2/3 votes applies.
 1. When is there an ultra vires act on the part of
(a) the corporation.
Answer: b. A mere majority of the quorum of
the Board of Directors applies. (BAR 2011)

Answer: Under Sec. 45 of the Corporation Code,

no corporation shall possess or exercise any
14. ABC Corporation declared stock dividends to
corporate power except those conferred by the
its stockholders. The stock dividends were
Code or by its articles of incorporation and
approved by the Board of Directors of ABC
except such as are necessary or incidental to
Corporation. In the subsequent year, however,
the exercise of the powers so conferred. When
the Board again approved the redemption of all
the corporation does an act or engages in an
stock dividends and to pay the shareholdings in
activity which is outside of its express, implied
cash. Which statement is most accurate?
or incidental powers set out in its articles of
incorporation, the act is deemed to be ultra
vires. (BAR 2009)
a) The redemption of the stock dividends can be
validly approved but hr Board without any
conditions; b) The redemption of stock
dividends may only be allowed if there are
sufficient earnings and should not be violative b. By the Shareholders c. By the Board of
of the trust fund doctrine; c) The redemption of Directors
the shares may be taken from the existing
1. When is there an ultra vires act on the part of
property and other assets of the corporation; d)
(b) the board of directors.
None of the above.

Page | 218
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
Answer: Examinee should be giver full credit
ratificatory vote, such as when the corporation
for whatever answer they gave as the question
is made to invest in another corporation or
is vague. (BAR 2012)
engage in a business which is not in pursuit of
its primary purpose, the board resolution not
ratified by stockholders owning or representing
h. Power to Enter Into Management Contract at least 2/3 of the outstanding capital stock
3. Ultra Vires Acts would make the transaction void, as being ultra
vires. (BAR 2009)
a. Applicability of Ultra Vires Doctrine b.
Consequences of Ultra Vires Acts
2. X Corp., whose business purpose is to
manufacture and sell vehicles, invested its
4. How Exercised funds in Y Corp., an investment firm, through a
a. By the Corporation resolution of its Board of Directors. The
investment grew tremendously on account of Y
Corp’s excellent business judgment. But a
minority stockholder in X Corp. assails the
Comment on the decision of the trial court.
investment as ultra vires. Is he right and, if so,
Discuss fully.
what is the status of the investment?

Answer: The trial court erred in holding Dick,

a. Yes, it is an ultra vires act of the corporation
President and General Manager of Turtle,
itself but voidable only, subject to stockholder’s
jointly and severally liable with TUTRTLE.
ratification. b. Yes, it is an ultra vires act of its
Board of Directors and thus void. c. Yes, it is an
ultra vires act of its Board of Directors but
voidable only, subject to stockholders’ In issuing the check issued to SHAMRON and,
ratification. d. Yes, it is an ultra vires act of the thereafter, stopping payment thereof, Seldon
corporation itself and, consequently, void. was acting in his capacity as an officer of
TURTLE. He was not acting in his personal
Page | 219 capacity. Furthermore, no facts have been
provided which would indicate that the action
of Seldon was dictated by intent to defraud
SHAMRON by himself or in collusion with
TURTLE. Having acted in what he considered as
Answer: c. Yes, it is an ultra vires act of its Board
his duty as an officer of the corporation, Seldon
of Directors but voidable only, subject to
should not be held personally liable. (BAR 1995)
stockholders’ ratification. (BAR 2011)

2. Rodman, the President of TF Corporation

d. By the Officers
wrote a letter to Gregorio, offering to sell to the
1. Ronald Sham doing business under the name latter 5,000 bags of fertilizer at P100 per bag.
of SHAMRON Macineries (SHAMRON) sold to Gregorio signed his conformity to the letter-
Turtle Mercantile (TURTLE) a diesel farm offer, and paid a down payment of P50,000. A
tractor. In payment, TURTLE’s President and few days later, the Corporate Secretary of TF
Manager Dick Seldon issued a check for P50,000 informed Gregorio of the decision of the Board
in favor of SHAMRON. A week after, TURTLE of Directors not to ratify the letter-offer.
sold the tractor to Briccio Industries (BRICCIO) However, since Gregorio had already paid the
for P60,000. BRICCIO discovered that the engine down payment, TF delivered the 500 bags of
of the tractor was reconditioned so he refused fertilizer which Gregorio accepted. TF made it
to pay TURTLE. As a result, Dick Seldon ordered clear that the delivery should be considered an
“stop payment” of the check issued to entirely new transaction. Thereafter, Gregorio
SHAMRON. sought enforcement of the letter-offer.

SHAMRON sued TURTLE and Dick Seldon. Is there a binding contract for the 5,000 bags of
SHAMRON obtained a favorable judgment fertilizer? Explain.
holding codefendants TURTLE and Seldon jointly
and severally liable.
Answer: No, there is no binding contract for the Answer: c) It is an ultra vires act. d) It is a valid
5,000 bags of fertilizers. First, the facts do not indorsement. (BAR 2012)
indicate that Rodman, the President of TF
Corporation, was authorized by the Board of
Directors to enter into the said contract or that 5. Trust Fund Doctrine
he was empowered to do so under some
provision of the by-laws of TF. The facts do not 1. A corporation executed a promissory note
also indicate that Rodman has been clothed binding itself to pay its President/ Director, who
with the apparent power to execute the had tendered his resignation, a certain sum in
contract or agreements similar to it. Second, TF payment of the latter’s shares and interests in
has specifically informed Gregorio that it has the company. The corporation defaulted in
not ratified the contract for the sale of 5,000 paying the full amount so that the said former
bags of fertilizer and that the delivery to President filed suit for collection of the balance
Gregorio of 500 bags, which Gregorio accepted, before the SEC.
is an entirely new transaction. (BAR 1996)

Is the arrangement between the corporation

3. When is there an ultra vires act on the part of and its President covered by the trust fund
(c) the corporate officers. doctrine? Explain your answers briefly.

Answer: When a corporate officer enters into a Answer: The arrangement between the
contract on behalf of the corporation without corporation and its President to the extent that
having been so expressly or impliedly it calls for the payment of the latter’s shares is
authorized by the board of Directors, even covered by the trust fund doctrine. The only
when the act or contract falls within the exceptions from the trust fund doctrine are the
corporation’s express, implied or incidental redemption of redeemable shares and, in the
power, then the unauthorized act of the case of close corporation, when there should be
corporate officer is deemed to be ultra vires. a deadlock and the SEC orders the payment of
(BAR 2009) the appraised value of a stockholder’s share.
(BAR 1992)

4. Y, as President of and in behalf of AAA

Corporation, as a way to accommodate X, one 2. Discuss the trust fund doctrine.
of its stockholders, endorsed the check issued
by X. Which statement is most accurate?
Answer: The trust fund doctrine means that the
capital stock, properties and other assets of a
e) It is an ultra vires act; f) It is a valid corporation are regarded as equity in trust for
indorsement; g) The corporation will be held the payment of corporate creditors. Stated
liable to any holder in due course; h) It is an simply, the trust fund doctrine states that all
invalid indorsement. 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
1. Doctrine of Centralized Management
of stock except only in instances specifically
allowed by the Corporation Code. (BAR 2007) 1. If a corporate lawyer who is at the same time
the administrative manager of the corporation,
enters into a compromise agreement in court so
I. Board of Directors and Trustees that a case involving the corporation could be
settled, would the corporation itself be bound
by such compromise agreement? Reasons.
1. May the composition of the board of
directors of the National Power Corporation
(NPC) be validly reduced to 3? Explain your Answer: The corporation is not bound by the
answer fully. compromise agreement. Only the board of
directors can act on behalf of the corporation in
compromising a court action, unless they have
Answer: The composition of the board of validly delegated such power to an officer or
directors of the NPC may not be validly reduced other agent. The Rules of Court require written
to 3. The Corporation Code applies in a authority to compromise for a corporation.
suppletory manner to corporations created by Since the lawyer and administrative manager in
special law. A corporation must have at least 5 this case as not authorized by the board, who
directors. (BAR 2008) did not even know of the compromise, the
corporation could not be bound. (BAR 1975)

Page | 221
2. What vote is needed to consider every
decision to be valid corporate act?
2. Section 39 of the SRC defines an independent
director as a person who must not have a
relation with the corporation which would a. A majority of the directors present at the
interfere with his exercise of independent meeting b. 2/3 of the directors present at the
judgment in carrying out the responsibilities of meeting c. A majority of the directors present at
a director. To ensure independence therefore, the meeting at which there is a quorum d. 2/3
he must be— of the directors present at the meeting at which
there is a quorum

a) Nominated and elected by the entire

shareholders; b) Nominated and elected by the Answer: c. A majority of the directors present at
minority shareholders; c) Nominated and the meeting at which there is a quorum (BAR
elected by the majority shareholders; d) 2014)
Appointed by the board.

2. Business Judgment Rule

Answer: c) Nominated and elected by the
majority shareholders. (BAR 2012)
1. On December 9, 1985, Matatag Corporation a) Because X was personally acting in behalf of
revalued its assets. On the basis of the the Corporation, he can be held personally
reappraisal, the Board of Directors also declared liable; b) X, as President, cannot be personally
cash dividends for all stockholders. On held liable for the obligation of the corporation
December 16, 1985, Matatag Corporation even though he signed all the loan documents,
amassed substantial profits in a highly lucrative because the loan was authorized by the Board;
transaction. Some minority stockholders, c) YYY Bank can choose as to who it wants to
however, did not want to complicate their hold liable for the loan; d) If ZZZ Corporation
income tax problems for 1985 and refused to cannot pay, X can be held subsidiarily liable.
accept the cash dividends. They also filed suit to
compel the other stockholders to return to
Matatag Corporation the money received as Answer: c) X, as President, cannot be personally
dividends. Not one of the stockholders who held liable for the obligation of the corporation
formed the majority joined in the suit since they even though he signed all the loan documents,
were happy with the money they received. because the loan was authorized by the Board.
(BAR 2012)

b) As one of its defenses in court, the board of

Directors raised the “business judgment rule”. 3. Tenure, Qualifications and Disqualifications of
What is the business judgment rule and does it Directors or Trustees
have any relevance to this case? Explain.
1. The Board of Directors of “C” Corporation,
engaged in the manufacture and sale of food
products, acting on a standing authority of the
Answer: b) The business judgment rule would
stockholders to amend the By-laws, amended
allow the board of directors to exercise
its By-Laws so as to disqualify any stockholder,
absolute but sound discretion on matters they
who is also a stockholder and director of a
are authorized to consider and act upon. In the
competitor, from being elected to its Board of
declaration of dividends, the rule has relevance
Directors.
for it lies upon the Board’s discretion when to
declare dividends, as well as the class and
extent thereof. (BAR 1986)
“S”, a stockholder holding sufficient shares to
assure him a seat in the Board, filed a petition
with the SEC for a declaration of nullity of the
2. X, the President of ZZZ Corporation, was
amended By-Laws and the cancellation of the
authorized by the Board of Directors of ZZZ
Certificate of Filing of Amended-By-Laws. He
Corporation to obtain a loan from YYY Bank and
alleged, among others, that as stockholder. He
to sign documents in behalf of the corporation.
had acquired rights inherent in stock
X personally negotiated for the loan and got the
ownership, such as the right to vote and be
loan at very low interest rates. Upon maturity of
voted upon in the election of directors.
the loan, ZZZ Corporation was unable to pay.
Which statement is most accurate?

Reason out the merits of the stockholder’s

petition.
 Neither E nor F are directors of ABC
Corporation. E automatically ceased to be a
Answer: Such an amendment in the By-Laws of
director upon the transfer of all his shares to F
“C” Corporation is reasonable and valid. This is
in the books of the corporation. Every director
based upon the principle that where the
must own at least one share of the capital stock
director is so employed in the service of a rival
of the corporation of which he is a director,
company, he cannot serve both, but must
which share shall stand in his name on the
betray one or the other. (Gokongwei, Jr. v.
books of the corporation. Any director who
Securities and Exchange Commission, April 11,
ceases to be the owner of at least 1 share of the
1979; 89 SCRA 336; April 21, 1980; 97 SCRA 78)
capital stock of the corporation of which he is a
(BAR 1981)
director shall thereby cease to be a director.

2. At the annual meeting of ABC Corporation for

F’s claims are without merit since he was not
the election of five directors as provided for in
duly elected as a director at the stockholders’
its articles of incorporation, A, B, C, D, E, F and G
meeting. Only the candidates receiving the
were nominated. A, B, C, D and E received the
highest number of votes shall be declared
highest number of votes and were proclaimed
elected. (BAR 1984)
elected. F received ten votes less than E.

3. Bohol Mining Corporation is 60% Filipino-

Subsequently, E sold all his shares to F. In the
owned and 40% Canadian-owned. As provided
next Board of Directors’ meeting following the
in its Articles of Incorporation and By-Laws, its
transfer of the shares in the books of the
Board of Directors is composed of 9 members.
corporation, both E and F appeared. E claimed
During the last annual stockholders meeting
that notwithstanding the sale of his shares to F,
held on May 31, three of the nine elected
he remained a director since the Corporation
directors were Canadian citizens. Juan de la
Code provides that directors “shall hold office
Cruz together with two other Filipino
for 1 year and until their successors are elected
stockholders petitioned the SEC to disqualify
and qualified.” On the other hand, F claimed
the said three Canadians and to enjoin them
that since he would have been elected as a
from discharging their functions as directors, on
director had it not been for E’s nomination and
the grounds that (1) aliens cannot participate in
election, then he (F) should now be considered
any capacity in a nationalized industry, like
a director as he had acquired all the shares of E.
mining; and (2) the exploitation of natural
resources is reserved under the Constitution to
Filipino citizens.
Decide with reasons.

Will the petition prosper?

Answer:

Page | 223
Answer: The petition will not prosper. The
elections of aliens as members of the board of
directors or governing body of corporations or
associations, engaging in partially nationalized- validy elected as a director since he was not a
activities, are allowed by law, in proportion to stockholder. Upon the death of Pedro and Juan,
their allowable participation or share in the only two remained as duly elected directors,
capital of such entities, like mining or namely: Segundo and Tercero. The agreement
development of natural resources, in which the between these two remaining directors
foreigners may even own 40% of the capital. obviously could not have permitted the due
(BAR 1985) election of other to fill the vacancies.

4. Primero, Segundo, Tercero, Pedro and Juan When the number of directors is increased, the
are the five original members of the Board of new position can only be filled by the
Directors of a stock corporation. The only stockholders in an election duly conducted.
interest of Primero is that 50% of the
corporation’s stocks were pledged to him.
Pedro and Juan died in a vehicular accident. Prescinding from all the foregoing. Tercero was
not duly elected as the new President of the
corporation. (BAR 1986)
Primero, Segundo, and Tercero held an
Page | 224
emergency board meeting to fill up the two
vacancies in the board. Primero and Tercero
were able to push through the selection of
Cuatro and Cinco as new directors over the
strong objections of Segundo who, as 5. The Board of Directors of X Corporation,
corporation president, wanted two other acting on a standing authority of the
persons as board members. stockholders to amend the by-laws, amended
its by-laws so as to disqualify any of its
stockholders who is also a stockholder and
Subsequently, the composition of the Board director of a competitor from being elected to
was validly increased to six. At another board its Board of Directors.
meeting, the four members of Primero’s group
voted Seis as the new sixth director. Segundo
voted for another person. When the six- Y, a stockholder holding sufficient shares to
member board convened, it decided by a five- assure him of a seat in the Board, filed a
to-one vote to replace President Segundo with petition with the SEC for a declaration of nullity
Tercero as the new President. of the amended by-laws. He alleged among
other things that as a stockholder, he had
acquired rights inherent in stock ownership
Were the elections of Cuatro, Cinco and Seis as such as the right to vote and be voted upon in
directors valid? Was the election of Tercero as the election of directors. Is the stockholder’s
new President valid? Explain. petition tenable?

Answer: The elections of Cuatro, Cinco and Seis Answer: No. There is no vested right of a
as directors were not valid. Primero was not stockholder to be elected as director. When a
person buys stock in a corporation he does so director or stockholder of a competing business
with the knowledge that its affairs are from being elected to the Board of Directors of
dominated by a majority of the stockholders. To MS Corporation, is valid. The corporation is
this extent, the stockholder parted with his empowered to adopt a code of by-laws for its
personal right to regulate the disposition of his government not inconsistent with the
property which he invested in the capital stock Corporation Code. Such disqualifying provision
of the corporation and surrendered it to the will is not inconsistent with the Corporation Code.
of the majority of his fellow incorporators or (BAR 2000)
stockholders.

7. Is a by-law provision of “X” Corporation

Corporations have the power to make by-laws “rendering ineligible or if elected, subject to
declaring a person employed in the service of a removal, a director if he is also a director in a
rival company to be ineligible for the corporation whose business is in competition
Corporation’s Board of Directors. An with or is antagonistic to said corporation” valid
amendment which renders a director ineligible, and legal? State your reason.
or if elected, subjects him to removal, if he is
also a director in a corporation whose business
is in competition with or is antagonistic to the Answer: Yes, the by-law provision is valid. It is
other corporation, is valid. (BAR 1998) the right of a corporation to protect itself
against possible harm and prejudice that may
be caused by its competitors. The position of
6. At the annual stockholders’ meeting of MS director is highly sensitive and confidential. To
Corporation, the stockholders unanimously say the least, to allow a person, who is a
passed a resolution authorizing the Board of director in a corporation whose business is in
Directors to amend the corporate by-laws so as competition with or is antagonistic to “X”
to disqualify any stockholder who is also a Corporation, to become also a director in “X”
director or stockholder of a competing business Corporation would be harboring a conflict of
from being elected to the Board of Directors of interest which is harmful to the latter. (BAR
MS Corporation. The by-laws were accordingly 2001)
amended. GK, a stockholder of MS Corporation
and a majority stockholder of a competitor,
sought election to the Board of Directors of MS 8. Your client Dianne approaches you for legal
Corporation. His nomination was denied on the advice on putting up a medium-sized restaurant
ground that he was ineligible to run for the business that will specialize in a novel type of
position. Seeking a nullification of the offending cuisine. As Dianne feels that the business is a
disqualification provision, GK consults you little risky, she wonders whether she should use
about its validity under the Corporation Code of a corporation as the business vehicle, or just
the Philippines. What would your legal advice run it as a single proprietorship. She already has
be? an existing corporation that is producing meat
products profitably and

Page | 225
Answer: The provision in the amended by-laws,
disqualifying any stockholder who is also a
is also considering the alternative of simply
setting up the restaurant as a branch office of
Answer: b. Feb. 1, 2011 (BAR 2011)
the existing corporation.

10. X is a Filipino immigrant residing in

1. If you advise your client to use a corporation,
Sacramento, California. Y is a Filipino residing
what officer position must the corporation at
Quezon City. Z is a resident alien residing in
least have?
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and
60% owned by Filipinos, with T as authorized
Answer: The corporation must have at least 4
representative. CCC Corporation is a foreign
directors. It must also have a president,
corporation registered with the Philippines SEC,
treasurer, and a secretary.
KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y.

2. What particular qualifications, if any, are

these officers legally required to possess under c) Who are qualified to become members of the
the Corporation Code? board of directors of the corporation?

Answer: Every director must own at least 1

share of the capital stock of the corporation,
Answer: c) X, Y, Z and T could be directors
which must be recorded in his name on the
(subject to the residency requirement
books of the corporation, and a majority of the
mentioned in (a) above and any nationality
directors must be residents of the Philippines.
requirement under the law governing the
business of the corporation) but not GGG
Corporation, CCC Corporation, and KKK
The president must also be a director. The Corporation as they are not natural persons.
secretary must be a resident and citizen of the However, the aforementioned corporations
Philippines. (BAR 2010) could have their respective representatives
nominated and possibly elected as directors by
the stockholders. Each director must own at
9. X is a director in T Corp. who was elected to a least one share of the capital stock of the
1-year term on Feb. 1, 2010. On April 11, 2010, corporation. (BAR 2012)
X resigned and was replaced by R, who assumed
as director on May 17, 2010. On Nov. 21, 2010,
R died. S was then elected in his place. Until 4. Elections
which time should S serve as director?
Page | 226

a. April 11, 2011 b. Feb. 1, 2011 c. May 17, 2011

d. Nov. 21, 2011
1. X Mining Co. is 70% Filipino-owned, the 30% that notwithstanding the sale of his shares to F,
remaining stock being owned by aliens. Under he remained a director since the Corporation
its Articles of Incorporation, its Board of Code provides that directors “shall hold office
Directors has 9 members. At the last election, 3 for 1 year and until their successors are elected
aliens were elected as Directors, but some and qualified.” On the other hand, F claimed
stockholders moved to disqualify all three of that since he would have been elected as a
them on account of their alien citizenship, the director had it not been for E’s nomination and
mining company being engaged in a election, then he (F) should now be considered
nationalized business. a director as he had acquired all the shares of E.

Decide with reasons. Decide with reasons.

Answer: Under the Constitution, the mining Answer: Neither E nor F are directors of ABC
business is partially nationalized and at least Corporation. E automatically ceased to be a
60% of its capital must belong to Filipino director upon the transfer of all his shares to F
citizens. Under the Anti-Dummy Law as in the books of the corporation. Every director
amended, the election of aliens as members of must own at least one share of the capital stock
the board of directors of corporations engaged of the corporation of which he is a director,
in partially nationalized activities is allowed in which share shall stand in his name on the
proportion to their allowable participation or books of the corporation. Any director who
share in the capital of such corporations. In the ceases to be the owner of at least 1 share of the
case at hand, 70% of the capital is owned by capital stock of the corporation of which he is a
Filipinos and 30% by aliens. Therefore, only 30% director shall thereby cease to be a director.
of its directors may be aliens. Since 3 out of 9 is
more than 30% only 2 aliens may sit in X’s
board. One of the elected alien directors is F’s claims are without merit since he was not
therefore disqualified and must give way to a duly elected as a director at the stockholders’
Filipino director. (BAR 1983) meeting. Only the candidates receiving the
highest number of votes shall be declared
elected. (BAR 1984)
2. At the annual meeting of ABC Corporation for
the election of five directors as provided for in
its articles of incorporation, A, B, C, D, E, F and G 3. The AB Memorial Foundation, Inc. was
were nominated. A, B, C, D and E received the incorporated as a non-profit, non-stock
highest number of votes and were proclaimed corporation in order to establish and maintain a
elected. F received ten votes less than E. library and museum in honor of the deceased
parents of the incorporators. Its Articles of
Incorporation provide for a board of trustees
Subsequently, E sold all his shares to F. In the composed of the 5 incorporators, which is
next Board of Directors’ meeting following the authorized to admit new members. The Articles
transfer of the shares in the books of the of Incorporation also allow the Foundation to
corporation, both E and F appeared. E claimed receive donations from members. As of January
30, 1993, 60 members had been admitted by
the board of trustees.
5. In the November 2010 stockholder’s meeting
of Greenville Corporation, 8 directors were
elected to the board. The directors assumed
One of the original trustees died and the other
their posts in January 2011. Since no
2 resigned because they immigrated to the
stockholders’ meeting was held in November
United States. How will the vacancies in the
2011, the 8 directors served in a holdover
board of trustees be filled?
capacity and thus continued discharging their
powers.

Answer: Since there are only 2 of the members

of the board of trustee remaining and there is
In June 2012, 2 of Greenville Corporation’s
no quorum, the vacancies will have to be filled
directors—Director A and Director B—resigned
up in a special meeting of the members. (BAR
from the board. Relying on Section 29 of the
1993
Corporation Code, the remaining 6 directors
elected 2 new directors to fill in the vacancy
caused by the resignation of Directors A and B.
Page | 227

Stockholder X questioned the election of the

4. The term 1 year of the Board of Directors of new directors, initially, through a letter-
AAA Corporation expired last February 15, complaint addressed to the board, and later
2012. No new election of the Board of Directors (when his letter-complaint went unheeded),
was called, hence, the existing members of the through a derivative suit filed with the court. He
Board continue as Directors in hold over claimed that the vacancy in the board should be
capacity. Which statement is most accurate? filled up by the vote of the stockholders of
Greenville Corporation. Greenville
Corporation’s directors defended the legality of
a) This is allowed provided there is a valid and their action, claiming as well that Stockholder
justifiable reason for not calling for an election X’s derivative suit was improper.
of the new members of the Board; b) This is not
allowed because the term of the directors must
only be for a period of 1 year; c) The positions Rule on the issued raised.
of the members of the Board of Directors will
be automatically declared vacant; d) Acting as
member of the Board of Directors in a hold over
Answer: The remaining directors cannot elect
capacity must be ratified by the stockholders.
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,
Answer: a) This is allowed provided there is a removal or increase in the number of board
valid and justifiable reason for not calling for an seats. In this case, the term of the two directors
election of the new members of the Board. expired after 1 year. They remained in office in
(BAR 2012) a hold-over capacity only until their resignation.
The hold-over period is not part of their term.
The vacancies should be filled up by election by
a. Unless set aside by the members in a plenary
the stockholders.
session. b. In every case even if the Board of
Trustees resolves otherwise. c. Unless
otherwise provided in the Articles of
The derivative suit was improper. In a derivative
Incorporation or in the By-laws. d. In every case
suit, the corporation, not the individual
even if the majority of the members decide
stockholder, must be the aggrieved party and
otherwise during the elections.
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
Answer: c. Unless otherwise provided in the
two directors. The case partakes more of an
Articles of Incorporation or in the By-laws. (BAR
election contest under the rules on intra-
2011)
corporate controversy. (BAR 2013)

b. Quorum
a. Cumulative Voting/Straight Voting

1. To constitute a quorum for the transaction of

1. EFG Foundation, Inc., a non-profit
corporate business, only a majority of the
organization, scheduled an election for its six-
number of Board of Directors is required:
member Board of Trustees. X, Y and Z, who are
minority members of the foundation, wish to
exercise cumulative voting in order to protect
their interest, although the Foundation’s a. As fixed by the corporate by-laws b. As fixed
Articles and By-laws are silent on the matter. As in the articles of incorporation c. Actually
to each of the three, what is the maximum serving in the board d. Actually serving in the
number of votes that he/she can cast? board but constituting a quorum

Page | 228 Answer: b. As fixed in the articles of

incorporation (BAR 2014)

a. 6 b. 9 c. 12 d. 3

5. Removal
Answer: a. 6 (BAR 2011)
1. If the minority stockholders in a stock
corporation cumulate their votes so that they
could be assured of being represented in the
2. In elections for the Board of Trustees of non-
Board of Directors, what assurance do they
stock corporations, members may cast as many
have that the director/s representing them
votes as there are trustees to be elected but
would not be removed, considering that under
may not cast more than one vote for one
the Corporation Code, a director “may be
candidate. This is true-
removed from office with or without cause by Answer: No. I would not allow the majority
the vote of the stockholders holding or stockholders to remove the director. While the
representing at least 2/3 of the outstanding stockholders may, by a 2/3 vote, remove a
capital stock? director, the law also provides, however, that
this right may not, without just cause, be
exercised so as to deprive the minority of
Answer: Although the Corporation Code allows representation in the board of directors. (BAR
removal of a director with or without cause, it 1991)
contains a proviso to the effect that such
removal, if without cause, cannot be used to
deprive the minority stockholders of their right 3. A law was passed disqualifying former
to representation through the use of cumulative members of Congress from sitting in the Board
voting. Therefore, the minority stockholders of Directors of GOCC. Because of this, the Board
who cumulate their votes to elect a of Directors of ABC Corp., a GOCC, disqualified
representative to the Board of Directors can be C, a former Congressman, from continuing to sit
assured of his continuance in office during his as one of its members. C objected, however,
term, unless he gives just cause for his removal. insisting that under the Corporation Code
(BAR 1983) members of the board of directors of
corporations may only be removed by vote of
stockholders holding 2/3 of its outstanding
2. ABC Management, Inc. presented to DEF capital stock in a regular or special meeting
Mining Corp. the draft of its proposed called for that purpose. Is C correct?
Management Contract. As an incentive, ABC
included in the terms of compensation that ABC
would be entitled to 10% of any a. Yes, since the new law cannot be applied to
members of the board of directors already
Page | 229
elected prior to its passage. b. No, since the
disqualification takes effect by operation of law,
it is sufficient that he was declared no longer
stock dividend which DEF may declare during member of the board. c. Yes, since the
the lifetime of the Management Contract. provisions of the Corporation Code applies as
Would you approve of such provision? If not, well to GOCC. d. No, since the board has the
what would you suggest as an alternative? power to oust him even without the new law.

Assuming that the minority block of the XYZ Answer: b. No, since the disqualification takes
Corporation is able to elect only 1 director and effect by operation of law, it is sufficient that he
therefore, the majority stockholders can always was declared no longer member of the board.
muster a 2/3 vote, would you allow the majority (BAR 2011)
stockholders to remove the one director
representing the minority?
6. Filling of Vacancies
1. Primero, Segundo, Tercero, Pedro and Juan obviously could not have permitted the due
are the five original members of the Board of election of other to fill the vacancies.
Directors of a stock corporation. The only
interest of Primero is that 50% of the
corporation’s stocks were pledged to him. When the number of directors is increased, the
Pedro and Juan died in a vehicular accident. new position can only be filled by the
stockholders in an election duly conducted.

Primero, Segundo, and Tercero held an

emergency board meeting to fill up the two Prescinding from all the foregoing. Tercero was
vacancies in the board. Primero and Tercero not duly elected as the new President of the
were able to push through the selection of corporation. (BAR 1986)
Cuatro and Cinco as new directors over the
strong objections of Segundo who, as
corporation president, wanted two other 7. Compensation
persons as board members.
1. After many difficult years, which called for
sacrifices on the part of the company’s
Subsequently, the composition of the Board directors, ABC Manufacturing Inc. was finally
was validly increased to six. At another board earning substantial profits. Thus, the President
meeting, the four members of Primero’s group proposed to the Board of Directors that the
voted Seis as the new sixth director. Segundo directors be paid a bonus equivalent to 15% of
voted for another person. When the six- the company’s net income before tax during the
member board convened, it decided by a five- preceding year. The President’s proposal was
to-one vote to replace President Segundo with unanimously approved by the Board. A
Tercero as the new President. stockholder of ABC questioned the bonus. Does
he have grounds to object?

Were the elections of Cuatro, Cinco and Seis as

directors valid? Was the election of Tercero as Answer: Yes, the stockholder has a valid and
new President valid? Explain. legal ground to object to the payment to the
directors of a bonus equivalent to 15% of the
company’s net income. The law provides that
the total annual compensation of directors, in
Answer: The elections of Cuatro, Cinco and Seis
the preceding year, cannot exceed 10% of the
as directors were not valid. Primero was not
company’s net income before income tax. (BAR
validy elected as a director since he was not a
1991)
stockholder. Upon the death of Pedro and Juan,
only two remained as duly elected directors,

Page | 230 2. Victor was employed in MAIA Corporation.

He subscribed to P1,500 shares of the
corporation at P100 per share or a total of
namely: Segundo and Tercero. The agreement P150,000. He made an initial down payment of
between these two remaining directors P37,500. He was appointed President and
General Manager. Because of his disagreement the fiduciary standards could not be upheld
with the Board of Directors, he resigned and where the fiduciary is acting for two entities
demanded payment of his unpaid salaries, his with competing interests.
cost of living allowance, his bonus, and
reimbursement of his gasoline and
representation expenses. Page | 231

MAIA Corporation admits that it owed Victor This doctrine rests fundamentally on the
P40,000 but told him that this will be applied to unfairness, in particular circumstances, of an
the unpaid balance of his subscription in the officer or director taking advantage of an
amount of P100,000. There was no call or opportunity for his own personal benefit when
notice for the payment of the unpaid the interest of the corporation justly needs
subscription. Victor questioned the set-off. protection. (BAR 1985)

1. May MAIA set-off unpaid subscription with 2. X subscribed and aid for P10,000 worth of
Victor’s claim for salaries? 2. Would your shares of stock of Rainbow Mines, Inc. as an
answer be the same if indeed there had been a incorporator and original subscriber. He was
call for the unpaid subscription? employed as the mine superintendent and as
such, made the design of certain equipment
used in its mines. Due to some technical error in
Answer: 1. No. MAIA cannot set-off the unpaid the design, the corporation suffered a loss of P1
subscription with Victor’s claim for salaries. The M. The Board accused X of infidelity and breach
unpaid subscription is not yet due as there is no of trust, and confiscated his shares. Is the action
call. of the Board legal?

2. Yes. The reason is that Victor is entitled to Answer: 1) The action of the Board is not legal.
the payment of his salaries which MAIA has no The rights and liabilities of X as the Mine
right to withhold in payment of unpaid Superintendent (or as an Officer) are apart from
subscription. To do so would violate Labor Laws. his rights and liabilities arising from being
(BAR 1994) likewise a stockholder. In general, in order that
directors and officers may be held personally
accountable they must have voted or assented
8. Fiduciaries Duties and Liability Rules to a patently illegal act, or are guilty of bad faith
or gross negligence, or are in conflict of interest
1. What is the so-called “doctrine of corporate with the corporation. A mere technical error
opportunity”? What is the underlying committed by X in the design of an equipment
philosophy upon which such doctrine rests? used by the company, absent fault or
negligence, would not warrant liability on his
part even as an employee. (BAR 1989)
Answer: The so-called “doctrine of corporate
opportunity” is a recognition by the courts that
3. ABC Piggery, Inc. is engaged in raising and directing the affairs of the corporation. (BAR
selling hogs in the local market. Mr. De Dios, 1997)
one of its directors, while travelling abroad, met
a leather goods manufacturer who was
interested in buying pig skins from the
Philippines. Mr. De Dios set up a separate
company and started exporting pig skins to his 5. Suppose that the by-laws of “X” Corporation,
foreign contact but the pig skins exported were a mining firm, provides that “The directors shall
not sourced from ABC. His fellow directors in be relieved from all liability for any contract
ABC complained that he should have given his entered into by the corporation with any firm in
business to ABC. How would you decide this which the directors may be interested.” Thus,
matter? director “A” acquired claims which overlapped
with “X’s” claims and where necessary for the
development and operation of “X’s” mining
properties.
Answer: I would decide in favor of Mr. De Dios.
ABC, Inc., is engaged in raising and selling hogs
in the local market. The company that Mr. De
Dios had set up was to engage, as it did, in the What happens if director “A” is able to
export of pig skins. There is thus no conflict of consummate his mining claims over and above
interest situation under the law. (BAR 1991) that of the corporation’s claims?

4. A, B and C are shareholders of XYZ Company. Answer:

A has an unpaid subscription of P100,000, B’s Page | 232
shares are fully paid up, while C owns only
nominal but fully paid up shares and is a
director and officer. XYZ Company becomes “A” should account to the corporation for the
insolvent, and it is established that the profits which he realized from the transaction.
insolvency is the result of fraudulent practices He grabbed the business opportunity from the
within the company. If you were counsel for a corporation. (BAR 2001)
creditor of XYZ Company, would you advice
legal action against C?
6. Malyn, Schiera and Jaz are directors of Patio
Investments, a close corporation formed to run
Answer: An action can be filed against C, not as the Patio Café, an al fresco coffee shop in
a stockholder because he has already paid up Makati City. In 2000, Patio Café began
the shares, but in his capacity as director and experiencing financial reverses, consequently,
officer because of the corporation’s insolvency some of the checks it issued to its beverage
being the result of fraudulent practices within distributors and employees bounced.
the company. Directors are liable jointly and
severally for damages sustained by the
corporation, stockholders or other persons
In October 2003, Schiera informed Malyn that
resulting from gross negligence or bad faith in
she found a location for a second café in Taguig
City. Malyn objected because of the dire unless his act was ratified by at least 2/3 of the
financial condition of the corporation. stockholders. (BAR 2005)

Sometime inApril 2004, Malyn learned about 8. The Board of Directors of XYZ Corp.
Fort Patio Café located in Taguig City and that unanimously passed a resolution approving the
its development was undertaken by a new taking of steps that in reality amounted to
corporation known as Fort Patio, Inc., where willful tax evasion. On discovering this, the
both Schiera and Jaz are directors. Malyn also government filed tax evasion charges against
found that Schiera and Jaz, on behalf of Patio the company’s members of the board of
Investments and personally guaranteed by directors. The directors invoked the defense
Schiera and Jaz. that they have no personal liability, being mere
directors of a fictional being. Are they correct?

Malyn then filed a corporate derivative action

before the RTC of Makati City against Schiera a. No, since as a rule only natural persons like
and Jaz, alleging that the two directors had the members of the board of directors can
breached their fiduciary duties by commit corporate crimes. b. Yes, since it is the
misappropriating money and assets of Patio corporation that did not pay the tax and it has a
Investments in the operation of Fort Pation personality distinct from its directors. c. Yes,
Café. since the directors officially and collectively
performed acts that are imputable only to the
corporation. d. No, since the law makes
a) Did Schiers and Jaz violate the principle of directors of the corporation solidarily liable for
corporate opportunity? Explain. gross negligence and bad faith in the discharge
of their duties.

Answer: a) Schiera and Jaz violated the principle

of corporate opportunity, because they used Answer: d. No, since the law makes directors of
Patio Investments to obtain a loan, mortgaged the corporation solidarily liable for gross
its assets and used the proceeds of the loan to negligence and bad faith in the discharge of
acquire a coffee shop through a corporation their duties. (BAR 2011)
they formed. (BAR 2005)

9. A, B, C, D, E, are all duly elected members of

7. Briefly discuss the doctrine of corporate the Board of Directors of XYZ Corporation. F,
opportunity. the general manager, entered into a supply
contract with an American firm. The contract
was duly approved by the
Answer: The doctrine of corporate opportunity Page | 233
means that if the director acquired for himself a
business opportunity that should belong to the
corporation, he must account to the
corporation for all the profits he obtained,
Board of Directors. However, with the incorporation and by-laws of the corporation,
knowledge and consent of F, no deliveries were the laws and regulations governing the business
made to the American firm. As a result of the of, or otherwise applicable to, the corporation,
non-delivery of the promised supplies, the and, in the case of officers, the resolution
American firm incurred damages. The American approved by the Board of Directors.
firm would like to file a suit for damages. The
American firm would like to file a suit for
damages. Can the American firm sue: As the directors have a personality separate
from that of the corporation, they would be
personally liable only if they acted willfully and
a) The members of the Board of Directors knowingly vote for or assent to a patently
individually, because they approved the unlawful act of the corporation, or when they
transaction? b) The corporation? c) F, the are guilty of gross negligence or bad faith in
general manager, personally, because the non- directing the affairs of the corporation, or when
delivery was with his knowledge and consent? they acquire any personal or pecuniary interest
d) Explain the rules on liabilities of a in conflict with their duty as directors, which
corporation for the act of its corporation acts result in damages to the corporation, its
officers and the liabilities of the corporate stockholders or other persons, when they agree
officers and Board of Directors of a corporation to hold themselves personally and solidarily
acting in behalf of the corporation. liable with the corporation, or when they are
made, by a specific provision of law, to
personally answer for the corporate action.
Answer: a) No. in approving the transaction, the (BAR 2012)
directors were not acting in their personal
capacities but rather on behalf of XYZ
Corporation exercising the powers of the 9. Responsibility for Crimes
corporation and conducting its business. The
1. When may a corporate director, trustee or
problem contains no facts that would indicate
officer be held personally liable with the
that the directors acted otherwise. b) Yes. The
corporation?
Board approved the supply contract and the
General Manager entered into the contract,
both of them acting on behalf of the XYZ
Corporation. c) Yes, F could be sued in his Answer: A corporate director, trustee or officer
personal capacity because he knowingly be held personally liable with the corporation
consented to the non-delivery of the promised under the following circumstances:
supplies contrary to the contract that was duly
approved by the Board of Directors. The
problem does not indicate any circumstance 1. When he assents to a patently unlawful act of
that would excuse or favorably explain the the corporation; 2. When he acts in bad faith or
action of F. d) A corporation would be liable for with gross negligence in directing the affairs of
the acts of its Board of Directors and officers if the corporation, or in conflict with the interest
the said acts were performed by them in of the corporation, its stockholders or other
accordance with the powers granted to them persons; 3. When he consents to the issuance of
under the Corporation Code, the articles of watered stocks or who, having knowledge
thereof, does not forthwith file with the
corporate secretary his written objection
At the meeting of the Board of Directors of
thereto; 4. When he agrees to hold himself
KWIK to approve the contract, Chito would have
personally and solidarily liable with the
to make sure that:
corporation; or 5. When he is made, by specific
provision of law, to personally answer for the
corporate action. (BAR 1996)
a) There is no fraud involved; and b) The
contract is fair and reasonable under the
circumstances.
Page | 234

2. If the conditions relating to quorum and

10. Inside Information 11. Contracts
required number of votes are not met, the
a. By Self-Dealing Directors with the contract must be ratified by the vote of
Corporation stockholders representing at least 2/3 of the
outstanding capital stock in a meeting called for
1. Chito Santos is a director of both Platinum
the purpose. Furthermore, the adverse interest
Corporation (PLATINUM) and KWIK Silver
of Chito in the contract must be disclosed and
Corporation (KWIK). He owns 1% of the
the contract is fair and reasonable. (BAR 1995)
outstanding capital stock of PLATINUM and 40%
of KWIK. PLATINUM plans to enter into a
contract with KWIK that will make both
2. Which of the following corporate acts are
companies earn very substantial profits. The
valid, void, or voidable? Indicate your answer by
contract is presented at the respective board
writing the paragraph number of the query,
meetings of PLATINUM and KWIK.
followed by your corresponding answer as
“valid”, “void” or “voidable”, as the case may
be. If your answer is “void”, explain your
1. In order that the contract will not be
answer. In the case of a “voidable” answer,
voidable, what conditions will have to be
specify what conditions must be present or
complied with? Explain. 2. If these conditions
complied with to make the corporate act valid.
are not met, how may this contract be ratified?
Explain.

2) XL Foods Corporation, which is engaged in

the fastfood business, entered into a contract
Answer: 1. At the meeting of the Board of
with its President Jose Cruz, whereby the latter
Directors of PLATINUM to approve the contract,
would supply the corporation with its meat and
Chito Santos would have to make sure that:
poultry requirements.

a) His presence as director at the meeting is not

Answer: 2) Voidable—A contract of the
necessary to constitute a quorum for such
corporation with one or more of its directors or
meeting; b) His vote is not necessary for the
trustees or officers is voidable, at the option of
approval of the contract; and c) The contract is
such corporation.(BAR 2002)
fair and reasonable under the circumstances.
 Where any of the first two conditions set forth
in the preceding paragraph is absent, in the
case of a contract with a director or trustee,
3. Pedro owns 70% of the subscribed capital such contract may be ratified by the vote of the
stock of a company which owns an office stockholders representing at least 2/3 of the
building. Paolo and Juan own the remaining outstanding capital stock or of at least 2/3 of
stock equally between them. Paolo also owns a the members in a meeting called for the
security agency, a janitorial company and a purpose: Provided, that full disclosure of the
catering business. In behalf of the office adverse interest of the directors or trustees
building company, Paolo engaged his involved is made at such meeting: Provided,
companies to render their service to the office however, that the contract is fair and
building. Are the service contracts valid? reasonable under the circumstances.” (BAR
Explain. 2008)

Answer: b. Between Corporations with Interlocking

Directors
Page | 235
1. Leonardo is the Chairman and President,
while Raphael is a Director of NT Corporation.
The service contracts are voidable at the option On one occasion, NT Corporation, represented
of office building company as provided in by Leonardo, and A Enterprises, a single
Section 32 of the Corporation Code, viz: proprietorship owned by Raphael, entered into
a dealership agreement whereby NT
Corporation appointed A Enterprises as
“Sec. 32. Dealing of directors, trustees or exclusive distributor of its products in Northern
officers with the corporation.— A contract of Luzon.
the corporation with one or more of its
directors or trustees or officers is voidable, at
the option of such corporation, unless all the Is the dealership agreement valid? Explain.
following conditions are present: 1. That the
presence of such director or trustee in the
board meeting in which the contract was Answer: The dealership agreement is voidable
approved was not necessary to constitute a at the option of NT inasmuch as the facts do not
quorum for such meeting; 2. That the vote of indicate that the same was approved by the
such director or trustee was not necessary for Board of Directors of NT Corporation before it
the approval of the contract; 3. That the was signed or, assuming such approval, that it
contract is fair and reasonable under the was approved under the following conditions:
circumstances; and 4. That in case of an officer,
the contract has been previously authorized by
the board of directors. 1. That the presence of Raphael, the owner of A
Enterprises, in the meeting of the Board of
Directors at which the agreement was approved
was not necessary to constitute a quorum for
such meeting; 2. That the vote of Raphael was (100%) Filipino owned. S is a Filipino, 16 years
not necessary for the approval of the of age, and daughter of Y.
agreement; 3. That the agreement is fair and
reasonable under the circumstances. (BAR
1996) d) Who are qualified to act as Treasurer of the
company? e) Who can be appointed Corporate
Secretary?
2. The Corporation Code sanctions a contract
between two or more corporations which have
interlocking directors, provided there is no
fraud that attends it and it is fair and reasonable
under the circumstances. The interest of an Answer: d) The Corporation Code does not
interlocking director in one corporation may be impose any nationality or residency
either substantial or nominal. It is nominal if his requirement in respect of the Treasurer. Any
interest: 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
a. Does not exceed 25% of the outstanding
the corporation or a law of general application
capital stock. b. Exceeds 25% of the outstanding
(e.g., the Anti-Dummy Law which applies to all
capital stock. c. Exceeds 20% of the outstanding
nationalized businesses). Accordingly, anybody
capital stock. d. Does not exceed 20% of the
with the qualifications required under the by-
outstanding capital stock.
laws of the corporation or under the law(s)
governing the business of the corporation,
could be elected Treasurer by the Board of
Answer: d. Does not exceed 20% of the
Directors. However, the Treasurer could not be
outstanding capital stock. (BAR 2011)
President at the same time.

Page | 236
e) The Secretary is required to be both a
resident and a citizen of the Philippines. (BAR
2012)
c. Management Contracts

12. Officers and Executive Committee

2. X, the President of ZZZ Corporation, was
1. X is a Filipino immigrant residing in authorized by the Board of Directors of ZZZ
Sacramento, California. Y is a Filipino residing Corporation to obtain a loan from YYY Bank and
Quezon City. Z is a resident alien residing in to sign documents in behalf of the corporation.
Makati City. GGG Corporation is a domestic X personally negotiated for the loan and got the
corporation—40% owned by foreigners and loan at very low interest rates. Upon maturity of
60% owned by Filipinos, with T as authorized the loan, ZZZ Corporation was unable to pay.
representative. CCC Corporation is a foreign Which statement is most accurate?
corporation registered with the Philippines SEC,
KKK Corporation is a domestic corporation
e) Because X was personally acting in behalf of
the Corporation, he can be held personally
Answer: The action of the Executive Committee
liable; f) X, as President, cannot be personally
with regard to the purchase of a delivery van for
held liable for the obligation of the corporation
use in the corporation’s retail business,
even though he signed all the loan documents,
declaration and approval of the 13th month
because the loan was authorized by the Board;
bonus, purchase of an office condominium unit
g) YYY Bank can choose as to who it wants to
at the Fort, and the declaration of P10.00 per
hold liable for the loan; h) If ZZZ Corporation
share cash dividend is valid, as such matters
cannot pay, X can be held subsidiarily liable.
were taken by a majority vote of all its
members, on such matters within the
competence of the board and as delegated to it
Answer: d) X, as President, cannot be personally
in the by-laws. (BAR 2014)
held liable for the obligation of the corporation
even though he signed all the loan documents,
because the loan was authorized by the Board.
4. Guetze and his wife have 3 chidren: Neymar,
(BAR 2012)
25, who is now based in Rio de Janeiro, Brazil;
Muelter, 23, who has migrated to Munich,
Germany; and James, 21, who resides in
3. Pursuant to its By-Laws, Soei Corporation’s
Bogota, Colombia. Neymar and Muelter have
Board of Directors created an Executive
since renounced their Philippine citizenship in
Committee to manage the affairs of the
favor of their country of residence. Nearing 70
corporation in between board meetings. The
years old, Guetze decided to incorporate his
Board of Directors appointed the following
business in Binondo, Manila. He asked his wife
members of the Executive Committee: the
and 3 children to act as incorporators with 1
President, Sarah L; the Vice-President, Jane L;
share of stock each, while he owned 999,996
and a third member from the board, Juan Riles.
shares of the 1,000,000 shares of the capital
On December 1, 2013, the Executive
stock.
Committee, with Sarah L and Jane L present,
met and decided on the following matters:

a. Being the control freak and micro-manager

that he is, Guetze asked you—his astute legal
1. Purchase of a delivery van for use in the
adviser— if he can serve as Chairman of the
corporation’s retail business; 2. Declaration and
Board of Directors, as President, and as General
approval of the 13th month bonus; 3. Purchase
Manager of the corporation, all at the same
of an office condominium unit at the Fort; and
time. Please advise Guetze.
4. Declaration of P10.00 per share cash
dividend.

Answer: a. Yes, Guetze can serve as Chairman,

as President, and as General Manager of the
Are the actions of the Executive Committee
corporation all at the same time. Section 25 of
valid?
the Corporation Code provides that “two or
more positions may be held concurrently by the
same person, except that no one shall act as
Page | 237
president and secretary or as president and principal corporate offices are at the Ortigas
treasurer at the same time.” Such case does not Center, Pasig, Metro
fall within the exception under the aforesaid
Page | 238
Section. (BAR 2014)

Manila while its factory processing leather

13. Meetings
products is in Manila. The corporation holds its
a. Regular or Special i. When and Where annual stockholder’s meeting at the Manila
Hotel in Manila and, its board of directors’
meeting at a hotel in Makati, Metro Manila. The
1. Under the Articles of Incorporation of Manila by-laws are silent as to the place of meetings of
Industrial Corporation, its principal place of the stockholders and the directors.
business shall be in Pasig, Metro Manila. The
principal corporate offices are at the Ortigas
Center, Pasig, Metro Manila while its factory Who shall preside at the meeting of the
processing leather products is in Manila. The directors?
corporation holds its annual stockholder’s
meeting at the Manila Hotel in Manila and, its
board of directors’ meeting at a hotel in Makati, Answer: The President presides over the
Metro Manila. The by-laws are silent as to the meeting of the directors, if there is no position
place of meetings of the stockholders and the of Chairman provided in the ByLaws. If there is
directors. the position of Chairman provided in the By-
Laws, the Chairman presides over the meeting
of the Directors. (BAR 1993)
Can the same stockholder question the validity
of the resolutions adopted by the board of
directors at the meeting held in Makati? c. Quorum d. Rule on Abstention

J. Stockholders and Members

Answer: No. The law allows the Board of 1. Rights of a Stockholder and Members
Directors to hold its meeting anywhere in the
Philippines. The holding of the board meeting in
Makati was proper and the validity of the 1. What are the rights of a stockholder?
resolution adopted by the Board in that
meeting cannot be question. (BAR 1992)
Answer: The rights of a stockholder are as
follows:
ii. Notice b. Who Presides

1. The right to vote, including the right to

1. Under the Articles of Incorporation of Manila appoint a proxy; 2. The right to share in the
Industrial Corporation, its principal place of profits of the corporation, including the right to
business shall be in Pasig, Metro Manila. The declare stock dividends; 3. The right to
proportionate share of the assets of the capital and by law and charter amendments
corporation upon liquidation; 4. The right of which may adversely affect him. Virtually
appraisal; 5. The preemptive right to shares; 6. ceasing to be recognized as a shareholder of
The right to inspect corporate books and record, B is therefore ineligible to be a director
records; 7. The right to elect directors; 8. Such of X Corporation. In this connection Sec. 23 of
other rights as may contractually be granted to the Corporation Code states: “Every director
the stockholders by the corporation or by must own at least 1 share of the capital stock of
special law. (BAR 1996) the corporation of which he is a director, which
share shall stand in his name on the books of
the corporation. Any director who ceases to be
a. Doctrine of Equality of Shares the owner of at least 1 share of the capital stock
of the corporation of which he is a director shall
2. Participation in Management thereby cease to be a director. x x x” (BAR 1977)
a. Proxy b. Voting Trust

1. A, as owner of a certain number of shares of 2. What is a “voting trust” and what are the
stock in X Corporation, entered into a voting legal limitations of the “voting trust
trust agreement with B. on the basis of the agreement”?
voting trust agreement, B announced his desire
to run for a seat in the Board of Directors of X
Corporation. C, another stockholder, objected
Answer: A “voting trust” is an arrangement in
and questioned the eligibility of B to be a
writing and notarized, whereby the
director of X Corporation.
stockholders, or a portion of them, transfer
their shares of stock to a trustee, who thereby
acquires the right to vote and other rights
Is C’s contention correct? Why? pertaining to the shares, for a period not
Page | 239 exceeding 5 years at any one time, and in return
trust certificates are given to the shareholders,
these certificates being transferrable, like stock
certificates are, subject, however, to the trust
agreement.
Answer: C’s contention is correct. The voting
trust involves a much more complete surrender
of all legal rights and remedies by the The legal limitations of the “voting trust
shareholders than any other control device. By agreement” are: No “voting trust agreement “
it, the beneficial owner ceases to be recognized shall be entered into (1) for the purpose of
as a shareholder of record and may be deprived circumventing the laws against monopolies and
not only of any right any right to vote for illegal combinations in restraint of trade, or (2)
directors, but also of any right to inspection; for purposes of fraud. (BAR 1985)
notice or information as against the corporation
or any voice in making most fundamental
changes, such as mergers and consolidation,
sales of entire assets, increase and reduction of
3. A distressed company executed a voting trust
agreement for a period of 3 years over 60% of
its outstanding paid-up shares in favor of a bank
to whom it was indebted, with the Bank named 1. In 1999, Corporation “A” passed a board
as trustee. Additionally, the Company resolution removing “X” from his position as
mortgaged all its properties to the Bank. manager of said corporation. The by-laws of “A”
corporation provides that the officers are the
president, vicepresident, treasurer and
Because of the insolvency of the Company, the secretary. Upon complaint filed with the SEC, it
Bank foreclosed the mortgaged properties, and held that a manager could be removed by mere
as the highest bidder, acquired said properties resolution of the board of directors. On motion
and assets of the Company. for reconsideration, “X” alleged that could only
be removed by the affirmative vote of the
stockholders representing 2/3 of the
The 3-year period prescribed in the Voting Trust outstanding capital stock. Is “X’s” contention
Agreement having expired, the company legally tenable. Why?
demanded the turnover and transfer of all its
assets and properties, including the
management and operation of the Company, Answer: No. Stockholders’ approval is necessary
claiming that under the Voting Trust only for the removal of the members of the
Agreement, the bank was constituted as trustee Board. For the removal of a corporate officer or
of the management and operations of the employee, the vote of the Board of Directors is
Company. sufficient for the purpose. (BAR 2001)

Does the demand of the Company tally with the

concept of a Voting Trust Agreement? Explain
iii. By Cumulative Voting
briefly.
3. Proprietary Rights

a. Right to Dividends
Answer: No. The demand of the Company does
not tally with the concept of a Voting Trust
Agreement. The Voting Trust Agreement merely
conveys to the trustee the right to vote the 1. Ace Cruz subscribed to 100,000 shares of
shares of grantor/s. the consequence of the stock of JP Development Corporation, which has
foreclosure of the mortgaged properties would a par value of P1 per share. He paid P25,000
be alien to the Voting Trust Agreement and its and promised to pay the balance before
effects. (BAR 1992) December 31, 2008. JP Development
Corporation declared a cash dividend on
October 15, 2008, payable on December 1,
2008.
c. Cases When Stockholders’ Action is Required
i. By a Majority Vote ii. By a Two-Thirds Vote

Page | 240
For how many shares is Ace Cruz entitled to be redemption of shares cannot be compelled.
paid cash dividends? Explain. While the certificate allows such redemption,
the option and discretion to do so are clearly
vested in the Corporation. (BAR 2009)
Answer: Ace is entitled to be paid cash
dividends for 100,000 shares of stock. Although
he has not fully paid for his shares of stock, he is Page | 241
not delinquent and is therefore entitled to all
the rights of a stockholder. (BAR 2008)
b. Right of Appraisal

1. What are the rights of the minority

2. On September 15, 2007, XYZ Corporation
stockholders who do not want to divert the
issued to Paterno 800 preferred shares with the
corporate funds into a secondary purpose?
following terms:

Answer: The appraisal right may be exercised by

“The Preferred Shares shall have the following
any stockholder who shall have voted against
rights, preferences, qualifications, and
the proposed corporate action, by making
limitations, to wit:
written demand on the corporation within 30
days after the date on which the vote was taken
for payment of the fair value of his shares:
3. The right to receive a quarterly dividend of
Provided, that failure to make the demand
1% cumulative participating; 4. These shares
within such period shall be deemed a waiver of
may be redeemed, by drawing of lots, at any
the appraisal right. If the proposed corporate
time after 2 years from date of issue, at the
action is implemented or affected, the
option of the Corporation; x x x.”
corporation shall pay to such stockholder, upon
surrender of the certificate/s of stock
representing his shares, the fair value thereof as
Today, Paterno sues XYZ Corporation for of the day prior to the date the vote was taken,
specific performance, for the payment of excluding any appreciation or depreciation in
dividends on, and to compel the redemption of, anticipation of such corporate action.
the preferred shares, under the terms and
conditions provided in the stock certificates.
Will the suit prosper? Explain.
If within a period of 60 days from the date the
corporate action was approved by the
stockholders, the withdrawing stockholder and
Answer: No. the suit will not prosper. Paterno the corporation cannot agree on the fair value
cannot compel XYZ Corporation to pay of the shares, it shall be determined and
dividends, which have to be declared by the appraised by 3 disinterested persons, one of
Board of Directors and the latter cannot do so, whom shall be named by the stockholder,
unless there are sufficient unrestricted retained another by the corporation, and the third by the
earnings. Otherwise, the corporation will be two thus chosen. The findings of the majority of
forced to use its capital to make said payments the appraisers shall be final, and their award
in violation of the trust fund doctrine. Likewise,
shall be paid by the corporation within 30 days At its inception, the Corporation offered for
after such award is made: Provided, that no subscription all the common shares. However,
payment shall be made to any dissenting only 40,000 shares were subscribed.
stockholder unless the corporation has
unrestricted retained earnings in its books to
cover such payment: and Provided, further, that Recently, the directors thought of raising
upon payment by the corporation of the agreed additional capital and decided to offer to the
awarded price, the stockholder shall forthwith public all the authorized shares of the
transfer his shares to the corporation. (Sec. 82, Corporation at their market value.
Corporation Code) (BAR 1977)

Assuming a stockholder disagrees with the

2. The stockholders of People Power, Inc. (PPI) issuance of new shares and the pricing for the
approved the following two resolutions in a shares, may the stockholder invoke his appraisal
special stockholder’s meeting: (i) Resolution rights and demand payment for his
increasing the authorized capital stock of PPI, shareholdings?
and (ii) Resolution authorizing the Board of
Directors to issue for cash payment the new
shares from the proposed capital stock increase Explain your answer.
in favor of outside investors who are non-
stockholders. The foregoing resolutions were
approved by stockholders representing 99% of Answer:
the total outstanding capital stock. The sole
dissenter was Jose Estrada who owned the rest Page | 242
1% of the stock.

No, the stockholder may not exercise appraisal

What remedies, if any, are available to Estrada? right because the matter that he dissented from
is not one of those where right of appraisal is
available under the Corporation Code. (BAR
Answer: Estrada, the dissenting stockholder, 1999)
may avail himself of the appraisal rights by
claiming that since the resolutions appear to
favor outside investors, as against incumbent 4. In a stockholder’s meeting, S dissented from
stockholders, on the increase in capital stock, the corporate act converting preferred voting
he may demand the payment of the appraised shares to non-voting shares. Thereafter, S
value of his shares. (BAR 1987) submitted his certificates of stock for notation
that his shares are dissenting. The next day, S
transferred his shares to T to whom new
3. ABC Corporation has an authorized capital certificates were issued. Now, T demands from
stock of P1 M divided into 50,000 common the corporation the payment of the value of his
shares and 50,000 preferred shares. shares.
a) What is the meaning of stockholder’s
appraisal right? b) Can T exercise the right of
Answer: b. No, the wife of the withdrawing
appraisal? Reason briefly.
shareholder is not a disinterested person. (BAR
2011)

Answer: a) Appraisal right is the right of a

stockholder, who dissents from a fundamental
6. The rule is that valuation of the shares of a
or extraordinary corporate action, to demand
stockholder who exercises his appraisal rights is
payment of the fair value of his shares. It is the
determined as of the day prior to the date on
right of a stockholder to withdraw from the
which the vote was taken. This is true-
corporation and demand payment of the fair
value of his shares after dissenting from certain
corporate acts involving fundamental changes
in the corporate structure. a. Regardless of any depreciation or
appreciation in the share’s fair value. b.
Regardless of any appreciation in the share’s
fair value. c. Regardless of any depreciation in
b) No, T cannot exercise the right of appraisal in
the share’s fair value. d. Only if there is no
this case. When S transferred his shares to T
appreciation or depreciation in the share’s fair
and T was issued new stock certificates, the
value.
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 that Answer: c. Regardless of any depreciation or
T acquired from the issuance of new stock appreciation in the share’s fair value. (BAR
certificates was the rights of a regular 2011)
stockholder. (BAR 2007)

c. Right to Inspect
5. In case of disagreement between the Page | 243
corporation and a withdrawing stockholder who
exercises his appraisal right regarding the fair
value of his shares, a three-member group shall 1. X filed a complaint with the SEC alleging that
by majority vote resolve the issue with finality. Redfield, Inc. had violated the provisions of the
May the wife of the withdrawing stockholder be Corporation Law. The SEC seeks to inspect the
named to the threemember group? books of the Corporation. Redfield, Inc.
objected to the inspection of its books by the
SEC on the ground that X, the complainant, is
a. No, the wife of the withdrawing shareholder not a stockholder of the corporation. Decide
is not a disinterested person. b. Yes, since she with reasons.
could best protect her husband’s shareholdings.
c. Yes, since the rules do not discriminate
against wives. d. No, since the stockholder Answer: The SEC may inspect the books of any
himself should sit in the three-member group. corporation under its jurisdiction in the course
of any investigation it may consider necessary
for the enforcement of the Corporation Law. It the right of inspection should be exercised in
can do this even on its own initiative, and thus it connection with the interest of the stockholder
should not matter whether the complainant is a in the corporation and not in relation to such an
stockholder or not. extraneous matter as the case in question. (BAR
1983)

2. A owns 100 out of 10,000 shares in the

Manufacturer’s Bank. He filed a suit against B 3. Section 51 of Act No. 1459 (Old Corporation
for damages due to an alleged breach of Law) in part provides as follows:
contract. A secures a favorable judgment
against B but fails to obtain full satisfaction
thereof. “The record of all business transactions of the
corporation and minutes of any meeting shall
be open to the inspection of any director,
A receives a tip that B has a big time deposit member or stockholder of the corporation at
with Manufacturer’s Bank. B is not aware that A reasonable hours.”
is a stockholder in the said bank. A goes to the
bank and demands the right to inspect the
records of the bank to find out whether B has Discuss the scope of this right (of a stockholder,
indeed such a time deposit and how much. The to inspect and examine the books and records
bank manager refuses to accede to his demand. of the corporation) under BP 68, otherwise
A threatens to sue him on the ground that as a known as the Corporation Code of the
stockholder of the corporation, he is given by Philippines.
the Corporation Code the right to inspect all the
books of the corporation.
Answer: Under BP 68, the right of inspection
given to any director, trustee, member or
Is A entitled to look at such records? Explain. stockholder of the Corporation at reasonable
hours is on business days throughout the whole
year, and not merely during the period of a few
Answer: No. under the Secrecy of Bank Deposits days or months. (BAR 1984)
Law, all bank deposits of whatever nature are
considered as absolutely confidential in nature
and may not be inquired into by any person 4. Petitioner who is a stockholder of Bilmoko
except under specified circumstances. This case Corporation wanted to examine the books and
does not come under any of these exceptions. records of a foreign subsidiary wholly owned by
The deposit is not the subject matter of the Bilmoko Corporation. The books and records of
action against B. Although it is true that under the foreign subsidiary were in the possession of
the Corporation Code a stockholder has the Bilmoko Corporation. The latter’s board of
right to inspect all the business records of his directors refused to allow the petitioner to
corporation, such right must give way to the examine said books and records, contending
limitations set forth under the special law that the foreign subsidiary is a separate and
mentioned, which was intended to encourage distinct corporation domiciled in another
deposits in banking institutions. Furthermore, country; hence, the petitioner was not within
the class of persons having an interest in the the stockholders in a meeting called for the
operations of the foreign subsidiary. purpose.

a) Decide the case. Pedro Reyes, who has 100 shares in the
corporation, alleging that he and all other
Page | 244
stockholders have a preemptive right to the
new shares, insists that the corporation issue to
him his proportionate quota of the new shares
b) What are the limitations on a stockholder’s which he offers to buy in cash. Holders of 80%
rights to inspect corporation books and of the outstanding capital stock are in favor of
records? the proposal to increase the capital stock,
including the exchange of Jose’s land for new
shares of stock.
Answer: a) The statutory right of a stockholder
to inspect the books and records of a
corporation extends—in consonance with Is Pedro Reyes within his rights in claiming a
equity, good faith and fair dealing—to a foreign preemptive right? Explain.
subsidiary wholly owned by the corporation.

Answer: Pedro Reyes, who has 100 shares in the

b) The right of inspection does not allow the corporation, has no preemptive right in this
stockholder to improperly use any information case. Under the Corporation Code (Sec.39), all
that is secured thereby. The stockholder must stockholders shall enjoy the preemptive right to
exercise the right in good faith and for a subscribe to all issues of shares in proportion to
legitimate purpose only. (BAR 1988) their respective shareholdings. However, under
the same provisions, such preemptive right
does not exist when shares are issued in
d. Pre-Emptive Right exchange for property needed for corporate
1. X Corporation is in need of land on which to purposes, provided stockholders representing
construct an additional factory to be used in the 2/3 of the subscribed capital stock approve such
expansion of its business Jose Cruz owns a piece issuance. Therefore, since more than 2/3 of the
of land in Tagaytay, Rizal, which is ideal for the stocks favored the proposal, Pedro Reyes
purpose, and the corporation offers to buy it at cannot insist on the preemptive right, otherwise
a fair price. Jose is willing to part with the land he will in effect make it impossible for the
on condition that he be paid in shares of stocks corporation to acquire Jose Cruz’s land which it
of the corporation. The Board of Directors needs for its new factory. (BAR 1983)
decides to accept the terms of Jose, but since
the authorized capital stock of the corporation
has been fully subscribed, it proposes to 2. XYZ Corporation has an authorized capital
increase the capital stock so that it can stock of P100.000, divided into 10,000 shares,
consummate the sale of the land. The proposal, each with a par value of P10. The subscribed
including the purchase of Jose’s land in capital stock is P50,000 or 5,000 shares. At the
exchange for the new shares was submitted to
time of incorporation, S subscribed to 1,000 3. ABC Corporation has an authorized capital
shares or P10,000. stock of P1 M divided into 50,000 common
shares and 50,000 preferred shares.

In need of additional funds, XYZ Corporation

proposes to offer the unsubscribed 5,000 shares At its inception, the Corporation offered for
to new stockholders at P15 per share or an subscription all the common shares. However,
aggregate amount of P75,000. only 40,000 shares were subscribed.

Explain whether or not S has a right to subscribe Recently, the directors thought of raising
to any of the 5,000 shares and, if so, at what additional capital and decided to offer to the
price? public all the authorized shares of the
Corporation at their market value.

Answer: S has a preemptive right to subscribe

to 1,000 shares of the 5,000 shares being a) Would Mr. X, a stockholder holding 4,000
offered since he is at present a stockholder with shares, have pre-emptive rights to the
1,000 shares of the 5,000 outstanding shares of remaining 10,000 shares? b) Would Mr. X have
the corporation. pre-emptive rights to the 50,000 preferred
shares? c) Assuming that the existing
Page | 245
stockholders are entitled to pre-emptive rights,
at what price will the shares be offered?

All stockholders of a stock corporation shall Explain your answers.

enjoy preemptive right to subscribe to all issues
or disposition of shares of any class, in
proportion to their respective shareholdings, Answer: a) Yes. Mr. X, a stockholder holding
unless such right is denied by the articles of 4,000 shares, has pre-emptive right to the
incorporation. As the law uses the phrase “all remaining 10,000 shares. All stockholders of a
issues or disposition of shares of any class”, the stock corporation shall enjoy preemptive right
preemptive right of stockholders under the to subscribe to all issues or disposition of shares
Corporation Code covers unissued shares which of any class, in proportion to their respective
form part of the authorized capital stock. shareholdings. The ruling in Benito v. Datu and
Tan v. SEC to the effect that preemptive right
applies only to issuance of shares in connection
The preemptive right of S is satisfied if the with an increase in capital is no longer a valid
shares are offered to him at the same price as rule under the Corporation Code. The facts in
that to be offered to the new stockholders, those cases happened during the regime of the
which is P15 per share. (BAR 1984) old Corporation Law.
b) Yes. Mr. X would have pre-emptive rights to corporation in proportion to the number of
the 50,000 preferred shares. All stockholders of share he holds on record in the corporation.
a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of
shares of any class, in proportion to their b) Preemptive right must be exercised in
respective shareholdings. accordance with the Articles of Incorporation or
the By-Law. When the Articles of Incorporation
and By-Laws are silent, the Board may fix a
c) The shares will be offered to existing reasonable time within which the stockholders
stockholders, who are entitled to pre-emptive may exercise the right. (BAR 2001)
right, at a price fixed by the Board of Directors,
which shall not be less than the par value of
such shares. (BAR 1999) 5. The Board of Directors of ABC, Inc., a
domestic corporation, passed a resolution
authorizing additional issuance of shares of
4. Suppose that “X” Corporation has already stocks without notice nor approval of the
issued the 1000 originally authorized shares of stockholders.
the corporation so that its Board of Directors
and stockholders wish to increase “X’s”
authorized capital stock. After complying with DX, a stockholder, objected to the issuance,
the requirements of the law on increase of contending that it violated his right of pre-
capital stock, “X” issued an additional 1000 emption to the unissued shares. Is his
shares of the same value. contention tenable? Explain briefly.

a) Assume that the stockholder “A” presently Answer: Yes. DX/s contention is tenable. Under
holds 200 out of the 1000 original shares. Section 39 of the Corporation Code, all
Would “A” have a preemptive right to 200 of stockholders of ABC, Inc. enjoy preemptive right
the new issue of 1000 shares? Why? b) When to subscribe to all issues of shares of any class,
should stockholder “A” exercise the preemptive including the reissuance of treasury shares in
right? proportion to their respective shareholdings.
(BAR 2004)

Answer:
6. So that ABC Corporation could venture into
Page | 246
more projects, it needed to raise funds by
issuing new shares to increase its capitalization.
X, Y, Z, J and G are the 5 existing shareholders of
a) Yes, “A” would have a preemptive right to
the company. They hold 20% each. How will the
200 of the new issue of 1000 shares. “A” is a
additional shares be divided among the existing
stockholder of record holding 200 shares in “X”
shareholders?
Corporation. According to the Corporation
Code, each stockholder has the preemptive
right to all issues of shares made by the
a) The existing shareholders can subscribe to stock corporation with par value (as in the
the new shares equivalent to their existing present case), the stockholder can vote the
shareholdings because the Corporation Code shares fully paid by him only, irrespective of the
provides that each of the existing stockholders unpaid delinquent shares. (Baltazar v. Lingayen
will have preemptive rights to the extent of Guild Electric Power Co., Inc., 14 SCRA 522)
their existing shareholdings; b) The existing (BAR 1977)
shareholders’ preemptive rights is equivalent to
Page | 247
the percentage that they want; c) Each of the
existing shareholder can exercise their right of
first refusal against each other; d) Preemptive
rights and right of first refusal are one and the
same. 2. A group of individuals, desiring to organize a
corporation, asked for your advice on the
following proposals:
Answer: a) The existing shareholders can
subscribe to the new shares equivalent to their
existing shareholdings because the Corporation a) As to voting rights.—All shares shall have the
Code provides that each of the existing same voting rights except that the common
stockholders will have preemptive rights to the shares shall not vote on any proposed increase
extent of their existing shareholdings. (BAR or decrease of the authorized capital stock.
2012)

What features of the foregoing proposals are

e. Right to Vote not permitted by law?
1. X subscribed to 700 shares of stock in a single
subscription to a corporation but paid only for
400 shares, for which he was issued fully paid Answer: The following features violate certain
certificates for 400 shares. Is he entitled to prescriptions set forth in Section 6 of the
vote the paid up shares notwithstanding the Corporation Code on the Classification of
fact that he has not paid the remaining 300 shares:
shares? Explain.

a) As to voting rights—
Answer: Yes. In this regard Section 64 of the
Corporation Code provides that “No certificate
of stock shall be issued to a subscriber until the 1) No shares may be deprived of voting rights
full amount of his subscription together with except those classified and issued as
interest and expenses (in case of delinquent “preferred” or “redeemable”. 2) The holders of
shares), if any is due, has been paid. As may shares, even non-voting shares in the cases
readily be seen, the said provision requires as a allowed by the Corporation Code, shall
condition before a shareholder can vote his nevertheless be entitled to vote on an increase
shares, that his full subscription be paid in the or decrease of capital stock. (BAR 1984)
case of the no par value stock; and in case of
3. Mercy subscribed to 1,000 shares of stock of
Rosario Corporation. She paid 25% of said
5. Dennis subscribed to 10,000 shares of XYZ
subscription. During the stockholders’ meeting,
Corporation with a par value of 100 per share.
can mercy vote all her subscribed shares?
However, he paid only 25% of the subscription
Explain your answer.
or P250,000. No call has been made on the
unpaid subscription.

Answer: Yes, Mercy can vote all her subscribed

shares. Section 72 of the Corporation Code
How many shares is Dennis entitled to vote at
state that holders of subscribed shares not fully
the annual meeting of the stockholders of XYZ?
paid which are not delinquent shall have all the
rights of a stockholder. (BAR 1990)

a) 10,000 shares; b) 2,500 shares; c) 100 shares;

4. The By-laws of the ABC Corporation is silent Page | 248
as to when a stockholder can be qualified to
attend the meeting of the stockholders. The
Corporate Secretary sent out the notice of the d) 0 shares; e) None of the above.
stockholders meeting 2 days before the
meeting and at that time X was not yet a
stockholder. On the day of the meeting, Answer: a) 10,000 shares (BAR 2013)
however, X became a shareholder which was
duly recorded in the stock and transfer book. f. Right of First Refusal
Which statement is most accurate?
4. Remedial Rights

a. Individual Suit
a) X is a stockholder of ABC Corporation as of
1. A group of stockholders of Sesame
the time of meeting of the stockholders for the
Corporation filed a court suit against the
purpose of electing the members of the board;
members of the Board of Directors to make
b) X is not qualified to elect members of the
good to the shareholders, in proportion to their
board because at the time the notice of the
shareholdings, the losses incurred by the
meeting was sent, she was not yet a
corporation because of the defendant Board of
stockholder; c) Qualifications as to who are
Directors’ management.
considered as stockholders on record for
purposes of being able to elect members of the
board are to be determined by the By-laws
Will the action prosper? Reasons.
alone; d) None of the above.

Answer: The action will not prosper since the

Answer: a) X is a stockholder of ABC
right belongs to the Corporation. Until the
Corporation as of the time of meeting of the
corporation is dissolved and the liquidation of
stockholders for the purpose of electing the
assets shall have been made, the shareholders
members of the board. (BAR 2012)
have no right over any specific asset of the
corporation. The suit should have been filed was given one share by another stockholder to
instead by and in the name of the corporation. qualify him as a director. A was not re-elected
(BAR 1988) director in the July 1, 1992 annual meeting but
he continued to be a registered shareholder of
PREC.
b. Representative Suit c. Derivative Suit

1. A small stockholder of a Bank filed a suit

When he was still a director, A discovered that
praying for an injunction to prevent the
on January 5, 1991, PREC issued free of charge
approval of the appointments of two persons
10,000 shares to X, a lawyer who assisted in a
whom he claimed were being appointed to their
court case involving PREC.
positions only for the purpose of shielding from
criminal prosecution the controlling
stockholder, alleged to be committing fraud in
1. Can A now bring an action in the name of the
the bank affairs. Defendants were the Board of
corporation to question the issuance of the
Director of the Bank, the two persons, whose
shares to X without receiving any payment?
appointments were being questioned, and the
controlling stockholder of the Bank. These Page | 249
defendants moved to dismiss the suit on the
ground that a mere stockholder is not allowed
to question the appointments because they 2. Can X question the right of A to sue him in
were corporate acts. Should the case be behalf of the corporation on the ground that A
dismissed? has only one share in his name?

Answer: The case should not be dismissed. Answer: 1. As a general rule, A cannot bring a
Although as a general rule, it is only the board derivative suit in the name of the corporation
of directors and not a mere stockholder who concerning an act that took place before he
can act on behalf of the corporation in became a stockholder. However, if the act
questioning the validity of corporate acts, complained of is a continuing one, A may do so.
where the directors themselves are the persons
responsible for the act questioned and can thus
not be expected to nullify it, a stockholder can 2. No. In a derivative suit, the action is
bring a derivative suit on behalf of the instituted/ brought in the name of a
corporation. It would be futile for him to ask the corporation and the reliefs are prayed for
board to bring the suit and since there is no therein for the corporation and reliefs are
other remedy, the derivative suit is recognized. prayed for therein for the corporation, by a
The stockholder in this case falls squarely within minority stockholder. The law does not qualify
this rule and therefore, the case should not be the term “minority” in terms of the number of
dismissed. (BAR 1975) shares owned by a stockholder bringing the
action in behalf of the corporation. (BAR 1993)

2. A became a stockholder of prime Real Estate

Corporation (PREC) on July 10, 1991, when he
3. The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special
Answer: No. All the requisites for a valid
stockholders’ meeting:
derivative suit exist in this case. First, AA was
exempt from exhausting his remedies within
the corporation, and did not have to make a
a) Resolution increasing the authorized capital
demand on the Board of Directors for the latter
stock of PPI; and b) Resolution authorizing the
to sue. Here, such a demand would be futile,
Board of Directors to issue, for cash payment,
since the directors who comprise the majority
the new shares from the proposed capital stock
(namely, BB, CC, DD and EE) are the ones guilty
increase in favor of outside investors who are
of the wrong complained of. Second, AA
non-stockholders.
appears to be stockholder at the time the
alleged misappropriation of corporate funds.
Third, the suit is brought on behalf and for the
The foregoing resolutions were approved by benefit of MOP Corporation. In this connection,
stockholders representing 99% of the total it was held in Conmart (Phils.) Inc. v. Securities
outstanding capital stock. The sole dissenter and Exchange Commission, 198 SCRA 73 (1991)
was Jimmy Morato who owned 1% of the stock. that to grant to the corporation concerned the
What remedies, if any, are available to Morato? right of withdrawing or dismissing the suit, at
the instance of the majority stockholders and
directors who themselves are the persons
Answer: Jimmy can petition the SEC to declare alleged to have committed the breach of trust
the 2 resolutions, as well as any and all actions against the interest of the corporation would be
taken by the Board of Directors thereunder, null to emasculate the right of minority stockholders
and void. (BAR 1998) to seek redress for the corporation. Filing such
action as a derivative suit even by a lone
stockholder is one of the protections extended
4. AA, a minority stockholder, filed a suit against by law to minority stockholders against abuses
BB, CC, CC, and EE, the holders of majority of the majority. (BAR 2004)
shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
complaint averred, inter alia, that MOP Page | 250
Corporation is the corporation in whose behalf
and for whose benefit the derivative suit is
brought. In their capacity as members of the 5. Malyn, Schiera and Jaz are directors of Patio
Board of Director, the majority stockholders Investments, a close corporation formed to run
adopted a resolution authorizing MOP the Patio Café, an al fresco coffee shop in
Corporation to withdraw the suit. Pursuant to Makati City. In 2000, Patio Café began
said resolution, the corporate counsel filed a experiencing financial reverses, consequently,
Motion to Dismiss in the name of the MOP some of the checks it issued to its beverage
Corporation. distributors and employees bounced.

Should the motion be granted or denied?

Reason briefly.
In October 2003, Schiera informed Malyn that
she found a location for a second café in Taguig
6. Atlantis Realty Corporation (ARC), a local firm
City. Malyn objected because of the dire
engaged in real estate development, plans to
financial condition of the corporation.
sell one of its prime assets—a 3-hectare land
valued at about P100 M. for this purpose, the
board of directors of ARC unanimously passed a
Sometime inApril 2004, Malyn learned about
resolution approving the sale of the property
Fort Patio Café located in Taguig City and that
for P75 M to Shangrila Real Estate Ventures
its development was undertaken by a new
(SREV), a rival realty firm. The resolution also
corporation known as Fort Patio, Inc., where
called for a special stockholders meeting at
both Schiera and Jaz are directors. Malyn also
which the proposed sale would be up for
found that Schiera and Jaz, on behalf of Patio
ratification.
Investments and personally guaranteed by
Schiera and Jaz.

Atty. Edric, a stockholder who owns only 1

share in ARC, wants to stop the sale. He then
Malyn then filed a corporate derivative action
commences a derivative suit for and in behalf of
before the RTC of Makati City against Schiera
the corporation from approving the sale.
and Jaz, alleging that the two directors had
breached their fiduciary duties by
misappropriating money and assets of Patio
a) Can Atty. Edric, who owns only 1 share in the
Investments in the operation of Fort Pation
company, initiate a derivative suit? Why or why
Café.
not?

b) Was it proper for Malyn to file a derivative

Answer: Yes, Atty. Edric can initiate a derivative
suit with a prayer for injunctive relief? Explain.
suit, otherwise known as the minority
c) Assuming that a derivative suit is proper, may
stockholders’ suit. It is allowed by law to enable
the action continue if the corporation is
the minority stockholder/s to protect the
dissolved during the pendency of the suit?
interest of the corporation against illegal or
Explain.
disadvantageous act/s of its officers or
directors, the people who are supposed to the
corporation.
Answer: b) It was proper for Malyn to file a
derivative suit with a prayer for injunction,
because Schiera and Jaz diverted the assets of
b) Will the suit prosper? Why or why not?
the corporation for their own personal benefit.

Answer: No. The suit will not prosper. There is

c) The case should be allowed to continue so
no requisite demand on the officers and
that the assets and claims should be
directors concerned. There is, therefore, no
administered for the benefit of all concerned, as
exhaustion of administrative remedies. (BAR
they should have been administered before the
2009)
dissolution of the corporation. (BAR 2005)
 Stockholder X questioned the election of the
new directors, initially, through a letter-
Page | 251
complaint addressed to the board, and later
(when his letter-complaint went unheeded),
through a derivative suit filed with the court. He
7. X is a minority stockholder of CCC claimed that the vacancy in the board should be
Corporation. Y is a member of the Board of filled up by the vote of the stockholders of
Directors of CCC Corporation and at the same Greenville Corporation. Greenville
time he is the President. X believes that Y is Corporation’s directors defended the legality of
mismanaging CCC Corporation hence, as a their action, claiming as well that Stockholder
stockholder and in behalf of the other X’s derivative suit was improper.
stockholders, he wanted to sue Y. which
statement is most accurate?
Rule on the issued raised.

a) X can institute a derivative suit in behalf of

himself as a stockholder; b) A derivative suit
Answer: The remaining directors cannot elect
must be instituted in behalf of the corporation;
new directors to fill in the two vacancies. The
c) Derivative suit is an exclusive remedy that X
board of directors may fill up vacancy only if the
can institute; d) Derivative suit is not the
ground is not due to expiration of term,
remedy in this situation.
removal or increase in the number of board
seats. In this case, the term of the two directors
expired after 1 year. They remained in office in
Answer: b) A derivative suit must be instituted a hold-over capacity only until their resignation.
in behalf of the corporation. (BAR 2012) The hold-over period is not part of their term.
The vacancies should be filled up by election by
the stockholders.
8. In the November 2010 stockholder’s meeting
of Greenville Corporation, 8 directors were
elected to the board. The directors assumed The derivative suit was improper. In a derivative
their posts in January 2011. Since no suit, the corporation, not the individual
stockholders’ meeting was held in November stockholder, must be the aggrieved party and
2011, the 8 directors served in a holdover that the stockholder is suing on behalf of the
capacity and thus continued discharging their corporation. What stockholder X is asserting is
powers. his individual right as a stockholder to elect the
two directors. The case partakes more of an
election contest under the rules on intra-
In June 2012, 2 of Greenville Corporation’s corporate controversy. (BAR 2013)
directors—Director A and Director B—resigned
from the board. Relying on Section 29 of the
Corporation Code, the remaining 6 directors 9. A, B, C, D and E were members of the 2003-
elected 2 new directors to fill in the vacancy 2004 Board of Directors of FLP Corporation. At
caused by the resignation of Directors A and B. the election for the 2004-2005 Board of
Directors, not one of them was elected. They
filed in court a derivative suit on behalf of FLP board of directors’ meeting at a hotel in Makati,
Corporation against the newly-elected Metro Manila. The by-laws are silent as to the
members of the Board of Directors. They place of meetings of the stockholders and the
questioned the validity of the election as it was directors.
allegedly marred by lack of quorum, and prayed
for the nullification of the said election. The
2004-2005 Board of Directors moved to dismiss Can Ting, a stockholder, who did not attend the
the complaint because the derivative suit is not stockholder’ annual meeting in Manila, question
proper. Decide. the validity of the corporate resolutions passed
at such meeting?

Answer: The derivative suit is not proper. The

party-in-interest are the petitioners as Answer: No. The law provides that the annual
stockholders, who were members of the 2003- stockholders’ meeting shall be held in the city
2004 Board of Directors of FLP Corporation. The or municipality where the principal office of the
cause of action devolves on the petitioners, not Corporation is located. For this purpose, the law
on FLP Corporation, which did not have the also provides that Metro Manila is considered a
right to vote. Hence, the complaint filed by A, B, city or municipality. Since the principal place of
C, D and E is a direct business of MIC is Pasig, Metro Manila, the
holding of the annual stockholders’ meeting in
Page | 252
Manila is proper. (BAR 1993)

action by the petitioners, who were the

ii. Notice
members of the Board of Directors of the
corporation before the election, against
respondents, who are the newly-elected Board
of Directors. Under the circumstances, the 1. At least 2/3 of the stockholders of Solar
derivative suit filed by petitioners in behalf of Corporation, meeting upon the
FLP is improper. (BAR 2014) recommendation of the Board of Directors,
declared a 50% stock dividend during their
annual meeting. The notice of the annual
stockholders’ meeting did not mention anything
5. Obligation of a Stockholder 6. Meetings
about a stock dividend declaration. The matter
a. Regular or Special was taken up only under the item “Other
Business” in the agenda of the meeting. C.K.
i. When and Where
Senwa, a stockholder, who received his copy of
1. Under the Articles of Incorporation of Manila the notice but did not attend the meeting,
Industrial Corporation, its principal place of subsequently learned about the 50% stock
business shall be in Pasig, Metro Manila. The dividend declaration. He desires to have the
principal corporate offices are at the Ortigas stock dividend declaration cancelled and set
Center, Pasig, Metro Manila while its factory aside, and wishes to retain your services as a
processing leather products is in Manila. The lawyer for the purpose.
corporation holds its annual stockholder’s
meeting at the Manila Hotel in Manila and, its
Will you accept the case? Discuss with reasons. Answer: A quorum consists of the majority of
the totality of the shares which have been
subscribed and issued. Thus the quorum for
Answer: I will not accept the case. Section 43 of such meeting would be 289 shares or a majority
the Corporation Code states that no stock of the 576 shares issued and outstanding as
dividend shall be issued without the approval of indicated in the articles of incorporation. This
the stockholders representing not less than 2/3 includes the 33 common shares reflected in the
of the outstanding capital stock at a regular or stocks and transfer book, there being no
special meeting duly called for that purpose. mention or showing of any transaction effected
Conformably with Section 50 of the Corporation from the time of Triple A’s incorporation in
Code, a written notice of the holding of the 1960 up to the said meeting. (BAR 2009)
regular meeting sent to the shareholders will
suffice. The notice itself specifies the said
subject matter. (BAR 1990) d. Minutes of the Meetings

K. Capital Structure

b. Who Calls the Meetings c. Quorum

Page | 253 1. As a result of perennial business losses, a

corporation’s net worth has been wiped out. In
fact, it is now in negative territory. Nonetheless,
1. Triple A Corporation (Triple A) was the stockholders did not like to give up.
incorporated in 1960, with 500 founder’s shares
and 78 common shares as its initial capital stock
subscription. However, Triple A registered its Creditor-banks, however, do not share the
stock and transfer books only in 1978, and confidence of the stockholders and refuse to
recorded merely 33 common shares as the grant more loans.
corporation’s issued and outstanding shares.

What tools are available to the stockholders to

In 1982, Juancho, the sole heir of one of the replenish capital?
original incorporators filed apetition with the
SEC for the registration of his property rights
over 120 founder’s shares and 12 common Answer: In the face of the refusal of the
shares. The petition was supported by a copy of creditor-banks to grant more loans, the
the Articles of Incorporation indicating the following are tools available to the stockholders
incorporators’ initial capital stock subscription. to replenish capital, to wit: (1) additional
subscription to shares of stock of the
corporation by stockholders or by investors; (2)
On May 6, 1992, a special stockholders’ meeting advances by the stockholders to the
was held. At this meeting, what would have corporation; (3) payment of unpaid subscription
constituted a quorum? Explain. by the stockholders. (BAR 1999)
1. Subscription Agreements 2. Consideration for the corporation are owned by it as an entity
Stocks separate and distinct from its stockholders.

1. Janice rendered some consultancy work for

XYZ Corporation. Her compensation included
Stockholders like Jaime only own shares of
shares of stock therein.
stock in the corporation. Such shares of stock
do not represent specific corporate property.
(BAR 1996)
Can XYZ Corporation issue shares of stock to
pay for the service of Janice as its consultant?
Discuss your answer.
b. Subscription Agreements

1. Mr. Balimbing signed a written subscription

Answer: The corporation can issue shares of for 100 shares of stock of Laban and Co., paying
stock to pay for actually performed services to 25% of the amount thereof. The corporation
the corporation, but not for future services or subsequently became insolvent due to a series
services yet to be performed. (BAR 2005) of financial reverses. Mr. Balimbing demanded
from the Corporate Secretary the stock
Page | 254
certificates corresponding to 25 shares which
he claimed was already paid. Since the
corporation was insolvent, Mr. Balimbing
3. Shares of Stock refused to pay for his remaining unpaid
a. Nature of Stock subscription.

1. PR Corporation owns a beach resort with

several cottages. Jaime, the President of PR, Is Mr. Balimbing correct in refusing to pay for
occupied one of the cottages for residential the remaining shares, the Company being
purposes. After Jaime’s term expired, PR already insolvent? Reasons.
wanted to recover possession of the cottage.
Jaime refused to surrender the cottage,
contending that as a stockholder and former
Answer:
President, he has a right to possess and enjoy
the properties of the corporation.

The refusal of Mr. Balimbing to pay is not

correct. The obligation to pay for unpaid
Is Jaime’s contention correct? Explain.
subscription is a liability of Mr. Balimbing that
has not yet been discharged, but is instead
entrenched under the trust fund doctrine upon
Answer: Jaime’s contention is not correct. Jaime the insolvency of the corporation. (BAR 1988)
may own shares of stock in PR Corporation but
such ownership does not entitle him to the
possession of any specific property of the
corporation or a definite portion thereof.
Neither is he a co-owner of a corporate 2. A, B and C are shareholders of XYZ Company.
property. Properties registered in the name of A has an unpaid subscription of P100,000, B’s
shares are fully paid up, while C owns only a share of stock of a corporation. As to unpaid
nominal but fully paid up shares and is a subscriptions to its shares of stock, as they are
director and officer. XYZ Company becomes regarded as corporate assets, they should be
insolvent, and it is established that the included in the
insolvency is the result of fraudulent practices
within the company. If you were counsel for a
creditor of XYZ Company, would you advice a. Capital value. b. Book value c. Par value. d.
legal action against A, B and C? Market value.

Answer: a) An action can be brought against A Answer: b. Book value. (BAR 2011)
for P100,000 which is the amount of his unpaid
subscription. Since the corporation is insolvent,
the limit of a stockholder’s liability to the 4. The BIR assessed ABC Corp. for deficiency
creditor is only up to the extent of his unpaid income tax for taxable year 2010 in the amount
subscription. of P26,731,208.00, inclusive of surcharge and
penalties.

b) There is no cause of action against B because

he has already fully paid for his subscription. As The BIR can _______.
stated earlier, the limit of the stockholder’s
liability to the creditor of the corporation, when
the latter becomes insolvent, is the extent of his a) Run after the directors and officers of the
subscription. ABC Corp. to collect the deficiency tax and their
Page | 255 liability will be solidary; b) Run after the
stockholders of ABC Corp. and their liability will
be joint; c) Run after the stockholders of ABC
Corp. and their liability will be solidary; d) Run
after the unpaid subscriptions still due to ABC
c) An action can be filed against C, not as a Corp., if any; e) None of the above choices is
stockholder because he has already paid up the correct’
shares, but in his capacity as director and officer
because of the corporation’s insolvency being
the result of fraudulent practices within the Answer: d) Run after the unpaid subscriptions
company. fDirectors are liable jointly and still due to ABC Corp., if any. (BAR 2013)
severally for damages sustained by the
corporation, stockholders or other persons
resulting from gross negligence or bad faith in c. Consideration for Shares of Stock
directing the affairs of the corporation. (BAR
1997) 1. A group of individuals, desiring to organize a
corporation, asked for your advice on the
following proposals:
3. It is settled that neither par value nor book
value is an accurate indicator of the fair value of
b) As to authorized capital stock—P1 M divided When he was still a director, A discovered that
into 500,000 no par value shares of preferred on January 5, 1991, PREC issued free of charge
stock to be offered at an issue value of P1.00 10,000 shares to X, a lawyer who assisted in a
per share, and 500,000 shares of common court case involving PREC.
stock, with par value of P1.00 per share.

Can not the shares issued to X be considered as

What features of the foregoing proposals are watered stock?
not permitted by law?

Answer: No. Watered shares are those sold by

Answer: The following features violate certain the corporation for less than the par/ book
prescriptions set forth in Section 6 of the value. In the instant case, it will depend upon
Corporation Code on the Classification of the value of services rendered in relation to the
shares: total par value of the shares. (BAR 1993)

b) As to authorized capital stock—

ii. Liability of Directors for Watered Stocks iii.

Trust Fund Doctrine for Liability for Watered
1) Preferred shares of stock may be issued only
Stocks
with a stated par value.
e. Situs of the Shares of Stock f. Classes of
Page | 256
Shares of Stock

1. The capital stock of ABC Corporation is

2) Shares without par value may not be issued divided into common shares and preferred
for a consideration less than the value of P5.00 shares. Preferred shares are preferred as to
per share. (BAR 1984) dividends and common shares are those shares
which have the regular and ordinary attributes
of a share of a corporation. Which statement is
d. Watered Stock most accurate?

i. Definition
a) This kind of classification may not be allowed
or else it will violate the Doctrine of Equality of
1. A became a stockholder of prime Real Estate shares; b) Classifications of shares may be
Corporation (PREC) on July 10, 1991, when he allowed for as long as it is clearly stated as such
was given one share by another stockholder to in the Articles of Incorporation of the
qualify him as a director. A was not re-elected Corporation; c) Classifications of shares is
director in the July 1, 1992 annual meeting but mainly for business purpose to attract investors;
he continued to be a registered shareholder of d) Classifications of shares may be allowed with
PREC. the approval of the stockholders and the Board
of Directors.
Answer: b) Classifications of shares may be Choose the correct statement relating to these
allowed for as long as it is clearly stated as such redeemable shares.
in the Articles of Incorporation of the
Corporation. (BAR 2012
a) ABC Corp. would need unrestricted retained
earnings to be able to redeem the shares; b)
2. A corporation generally can issue both par Corporations are not allowed to issue
value stock and no par value stock. These are all redeemable shares; thus, the issuance by ABC
fixed in the Articles of Incorporation of the Corp. is ultra vires; c) Holders of redeemable
corporation. Which of the following shared enjoy a preference over creditors; d)
corporations may not be allowed to issue no par ABC Corp. may redeem the shared at the end of
value shares? 10 years without need for unrestricted retained
earnings provided that, after the redemption,
there are sufficient assets to cover its debts; e)
a) Insurance companies; b) Banks; c) Trust All of the above are incorrect.
Companies; d) All of the above.

Page | 257
Answer: d) ABC Corp. may redeem the shared
at the end of 10 years without need for
unrestricted retained earnings provided that,
after the redemption, there are sufficient assets
Answer: b) Banks. (BAR 2012) to cover its debts. (BAR 2013)

3. Preferred shares cannot vote on the proposal 4. Payment of Balance of Subscription

_______. a. Call by Board of Directors

1. A subscribed to 100 shares of stock of

a) To include other corporate officers in the corporation X with par value of P100.00 each,
corporation’s by-laws; b) To issue corporate paying P2,500.00 on his subscription.
bonds; c) All of the above; d) None of the Subsequently, A asked B, the president of the
above. corporation, to release him from his
subscription. B consented provided that A
forfeits to the company what he already paid. A
Answer: e) None of the above. (BAR 2013) agreed and B gave him a certificate of release.
Not long afterwards, X went into insolvency and
an assignee was appointed. The assignee now
seeks to collect from A the unpaid balance of
4. ABC Corp. issued redeemable shares. Under
his subscription. Decide the dispute with
the terms of the issuance, the shares shall be
reasons.
redeemed at the end of 10 years from date of
issuance, at par value plus a premium of 10%.
Answer: The assignee of the insolvent X unpaid subscription is not yet due as there is no
corporation may collect from A the unpaid call. (BAR 1994)
balance of his subscription. The president of a
corporation has no legal capacity to release as
subscriber from his unpaid subscription. The b. Notice Requirement c. Sale of Delinquent
insolvency of X corporation makes all Shares
subscription payable on demand without call
and recoverable in an action instituted by the i. Effect of Delinquency
assignee. (Velasco v. Poizat, 37 Phil. 802) (BAR 1. The Board of Directors of a corporation, by a
1979) vote of ten in favor and one against, declared
due and payable all unpaid subscription to the
capital stock. The lone dissenting director failed
2. Victor was employed in MAIA Corporation. to pay on due date, i.e., September 19, 1997,
He subscribed to P1,500 shares of the his unpaid subscription. Other than the shares
corporation at P100 per share or a total of wherein he was unable to complete payment,
P150,000. He made an initial down payment of he did not own any share in the corporation. On
P37,500. He was appointed President and September 23, 1997, he was informed by the
General Manager. Because of his disagreement Board of Directors that, unless due payment is
with the Board of Directors, he resigned meanwhile received, he
Page | 258

a) Could no longer serve as a director of the

corporation forthwith; b) Would not be entitled
and demanded payment of his unpaid salaries,
to the cash and stock dividends which were
his cost of living allowance, his bonus, and
declared and payable on September 24, 1997;
reimbursement of his gasoline and
and c) Could not vote in the stockholders
representation expenses.
meeting scheduled to take place on September
26, 1997.

MAIA Corporation admits that it owed Victor

P40,000 but told him that this will be applied to
Was the action of the Board of Directors on
the unpaid balance of his subscription in the
each of the foregoing matters valid?
amount of P100,000. There was no call or
notice for the payment of the unpaid
subscription. Victor questioned the set-off.
Answer: a) No. the period 30 days within which
the stockholder can pay the unpaid subscription
had not yet expired.
May MAIA set-off unpaid subscription with
Victor’s claim for salaries?

b) No. The delinquency did not deprive the

stockholder of his right to receive dividends
Answer: No. MAIA cannot set-off the unpaid
declared. However, the cash dividend declared
subscription with Victor’s claim for salaries. The
may be applied by the corporation to the
unpaid subscription.
 Answer: Yes, the Corporation Code expressly
provides that no certificate of stock shall be
c) No. the period of 30 days within which the
issued unless the full amount of the
stockholder can pay the unpaid subscription
subscription is paid. This is to say that a partial
had not yet expired. (BAR 1997)
payment of the subscription amount is
allocated or apportioned to the entire number
of the subscribed shares and, therefore, each
share subscribed by Mr. Balimbing would been
ii. Call by Resolution of the Board of Directors iii. paid only to the extent of 25% thereof. (BAR
Notice of Sale iv. Auction Sale and the Highest 1988)
Bidder

5. Certificate of Stock 2. Ace Cruz subscribed to 100,000 shares of

a. Nature of the Certificate b. Uncertificated stock of JP Development Corporation, which has
Shares c. Negotiability a par value of P1 per share. He paid P25,000
and promised to pay the balance before
Page | 259 December 31, 2008. JP Development
Corporation declared a cash dividend on
October 15, 2008, payable on December 1,
i. Requirements for Valid Transfer of Stocks 2008.
d. Issuance

i. Full Payment On December 1, 2008, can Ace Cruz compel JP

Development Corporation to issue to him the
1. Mr. Balimbing signed a written subscription
stock certificate corresponding to the P25,000
for 100 shares of stock of Laban and Co., paying
paid by him?
25% of the amount thereof. The corporation
subsequently became insolvent due to a series
of financial reverses. Mr. Balimbing demanded
from the Corporate Secretary the stock Answer: No, Ace cannot compel JP to issue to
certificates corresponding to 25 shares which him a stock certificate corresponding to P25,000
he claimed was already paid. Since the paid by him. (BAR 2008)
corporation was insolvent, Mr. Balimbing
refused to pay for his remaining unpaid
subscription. 3. X subscribed 10,000 shared in the capital
stocks of AAA Corporation. He paid 50% of the
10,000 shares. X asked the Corporate Secretary
Can the Corporate Secretary validly refuse to to issue him the corresponding stock certificate
issue stock certificates in the name of Mr. representing the 50% of what he already paid.
Balimbing for 25 shares despite the payment of The Corporate Secretary of the corporation
25% of the subscription of 100 shares? Reasons. refused. Was the Corporate Secretary correct?

a) The Corporate Secretary is correct because

the Corporation Code provides that no
certificate of stock shall be issued to a subscriber’s right consists only in equity
subscriber until the shares as subscribed have entitling him to a certificate upon payment of
been fully paid; b) The Corporate Secretary the remaining portion of the subscription
cannot refuse because a Stock Certificate can be price.” Comment on the said ruling, with
issued corresponding to the percentage of reasons.
shares which were paid; c) The Corporation
Secretary cannot refuse because a certificate of
Stock can be issued provided it is indicated in Answer: Although the general rule is as stated
the Certificate the actual percentage of what by the trial court, the Supreme Court held in the
has been paid; d) The Corporate Secretary case of Baltazar v. Lingayen Gulf Eectric Power
cannot refuse because it is his legal duty to Co. that the stockholder was entitled to the
issue a stock certificate corresponding to the issuance of certificates of stock for the 1000
number of shares actually subscribed regardless shares paid by him. The court considered the
of the actual payment. fact that it was the practice of this corporation
to issue certificates of stock partially paid
subscriptions by applying the payment, not pro
Answer: a) The Corporate Secretary is correct rata to each share, but as consideration for
because the Corporation Code provides that no whole shares. The case therefore fell under the
certificate of stock shall be issued to a exception in the Fua Cun v. Summer case: “In
subscriber until the shares as subscribed have the absence of an agreement to the contrary.”
been fully paid. (BAR 2012)

Commenting on the Fua Cun ruling, I would say

that it is sound because a stockholder will feel
bound to pay for all his subscription, lest all his
ii. Payment Pro-Rata
shares be declared delinquent if he fails to pay.
Page | 260 Prorating the payment means that not one of
his shares is fully paid, and any failure on his
part to pay when demanded will render all his
1. After subscribing to 3,000 shares of corporate shares delinquent. On the other hand, if the
stock with a par value of P100 each, a Baltazar v. Lingyen case is followed in all cases,
stockholder paid for 1,000 shares or a total sum a stockholder, if he believes that the corporate
of P100,000.00 he then asked for the issuance business will be a failure, will just let the other
to him of certificate of stock for the P1,000 unpaid shares become delinquent. Anyway he
paid-up shares so that he may have voting has the certificate for his fully paid shares.
rights but the corporation refused. In the trial
court, the judge resolved the case against the
stockholder, ruling that—“in the absence of These two cases can be reconciled by
special agreement to the contrary, a subscriber considering the Baltazar v. Lingayen Gulf case as
for a certain number of shares of stock does an exception to the Fua Cun principle. In other
not, upon payment of one-third of the words, as a general rule, partial payment on a
subscription price, become entitled to the subscription of shares should be prorated
issuance of certificates for onethird of the among all the shares and will not entitle the
number of shares subscribed for; the subscriber to a certificate of stock representing
the number of shares which the partial payment claim the certificate of stock from the thief who
can cover. He is entitled to the certificate only has no right or title to the same. “One who has
upon full payment of his subscription. However, lost any movable or
where the agreement between the corporation
Page | 261
and the subscriber is otherwise, or the
corporation’s practice has been to so issue
certificates instead of prorating payment, then
the subscriber is entitled to a certificate of stock has been unlawfully deprived thereof, may
representing the number of shares already paid recover it from the person in possession of the
for. (BAR 1975) same.” (BAR 2001)

e. Lost or Destroyed Certificates

1. “A” is the registered owner of Stock 6. Stock and Transfer Book

Certificate No. 000011. He entrusted the 1. What is a stock and transfer book?
possession of said certificate to his best friend
“B” who borrowed the said endorsed certificate
to support B’s application for passport (or for a Answer: a stock and transfer book is a book
purpose other than transfer). But “B” sold the which records all stocks in the name of the
certificate to “X”, a bona fide purchaser who stockholders alphabetically arranged; the
relied on the endorsed certificates and believed installments paid or unpaid on all stocks for
him to be the owner thereof. which subscription has been made and the date
of payment of any installment, a statement of
every alienation, sale or transfer of stock made,
a) Can “A” claim the shares of stocks from “X”? the date thereof, and by and to whom made;
Explain. b) Would your answer be the same if and such other entries as the by-laws may
“A” lost the stock certificate in question or if it prescribe. (BAR 2009)
was stolen from him?

a. Contents b. Who May Make Valid Entries

Answer: a) No. Assuming that the shares were
already transferred to “B”. “A” cannot claim the 1. Four months before his death, PX assigned
shares of stock from “X” the certificate of stock 100 shares of stock registered in his name in
covering said shares have been duly endorsed favor of his wife and his children. They then
by “A” and entrusted by him to “B”. by his said brought the deed of assignment to the proper
acts “A” is now estopped from claiming said corporate officers for registration with the
shares from “X”, a bona fide purchaser who request for the transfer in the corporation’s
relied on the endorsement by “A” of the stock and transfer books of the assigned shares,
certificate of stock. the cancellation of the stock certificates in PX’s
name, and the issuance of new stock
certificates in the names of his wife and his
b) Yes. In the case where the certificate of stock children as the new owners. The officers of the
was lost or stole from “A”, “A” has a right to Corporation denied the request on the ground
that another heir is contesting the validity of
the deed of assignment.
Page | 262

May the Corporation be compelled by

“C” received the notice and by virtue of the
mandamus to register the shares of stock in the
aforestated deed of partition claimed payment
names of the assignees? Explain briefly.
of the dividend. “B” likewise claimed payment
asserting ownership of the shares by virtue of
the assignment made by “A”.
Answer: Yes. The corporation may be compelled
by mandamus to register the shares of stock in
the name of the assignee. The only legal
Who has the better right? Explain briefly.
limitation imposed by Section 63 of the
Corporation Code is when the Corporation
holds any unpaid claim against the shares
intended to be transferred. The alleged claim of Answer: “C” has a better right. A transferee
another heir of PX is not sufficient to deny the cannot maintain an action for a dividend not
issuance of new certificates of stock to his wife until the shares are transferred in his name in
and children. It would be otherwise if the the books of the corporation. The corporation is
transferee’s title to the shares has no prima not bound to look beyond its books to
facie validity or is uncertain. (BAR 2004) determine who is entitled to dividends, but may
safely pay them to the registered shareholders.
(BAR 1981)
7. Disposition and Encumbrance of Shares

a. Allowable Restrictions on the Sale of Shares 2. Mr. Cruz purchased from Mr. Guzman shares
b. Sale of Partially Paid Shares c. Sale of a of stock of a mining corporation, which shares
Portion of Shares Not Fully Paid d. Sale of All of were covered by several certificates indorsed in
Shares Not Fully Paid e. Sale of Fully Paid Shares blank by Mr. Virgilio Malic in whose name the
f. Requisites of a Valid Transfer same were registered in the books of the
corporation. It was later discovered that the
1. “A”, stockholder of “X Corporation”, assigns
said shares had never been sold or otherwise
his shares of stock to “B” for a valuable
disposed of by Mr. Virgilio Malic, but had been
consideration. The certificate of stock was
stolen from where they were kept.
thereupon delivered to “B”. A few days later,
“A” died. The heirs of “A”, in a Deed of Extra-
Judicial Partition, adjudicated his shares of stock
to his son “C”. Who is entitled to said shares, Mr. Cruz or Mr.
Malic? Reason.

In the meantime, “X Corporation” declared cash

dividends and sent the corresponding notice to Answer: Mr. Malic is entitled to said shares.
“A’s” address; “A”, being the registered owner According to the Corporation Code, no transfer
of the shares of stock in the books of the of the shares of stock shall be valid, except as
corporation. between the parties, until the transfer is
recorded in the books of the corporation. No to support B’s application for passport (or for a
such entry in the name of Mr. Cruz having been purpose other than transfer). But “B” sold the
made, it follows that the transfer allegedly certificate to “X”, a bona fide purchaser who
effected by Mr. Guzman to Mr. Cruz, is valid relied on the endorsed certificates and believed
between themselves, but it does not bind Mr. him to be the owner thereof.
Malic, who is not a party to said alleged
transaction. In other words, the same is
absolutely void, insofar as Mr. Malic is c) Can “A” claim the shares of stocks from “X”?
concerned. (Sec. 63, Corporation Code; De Los Explain.
Santos v. McGrath, L-4818, Feb. 28, 1955) (BAR
1982)
Answer: c) No. Assuming that the shares were
already transferred to “B”. “A” cannot claim the
3. Arnold has in his name 1,000 shares of the shares of stock from “X” the certificate of stock
capital stock of ABC Corporation as evidenced covering said shares have been duly endorsed
by a stock certificate. Arnold delivered the stock by “A” and entrusted by him to “B”. by his said
certificate to Steven who now claims to be the acts “A” is now estopped from claiming said
real owner of the shares, having paid for shares from “X”, a bona fide purchaser who
Arnold’s subscription. ABC refused to recognize relied on the endorsement by “A” of the
and register Steven’s ownership. certificate of stock. (BAR 2001)

Page | 263
Is the refusal justified? Explain.

Answer: ABC’s refusal to recognize and register 5. Four months before his death, PX assigned
Steven’s ownership is justified. The facts 100 shares of stock registered in his name in
indicate that the stock certificate for the 1,000 favor of his wife and his children. They then
shares in question is in the name of Arnold. brought the deed of assignment to the proper
Although the certificate was delivered to Steven corporate officers for registration with the
or that the procedure for the effective transfer request for the transfer in the corporation’s
of shares of stock set out in the by-laws of ABC stock and transfer books of the assigned shares,
Corporation, if any, was observed. Since the the cancellation of the stock certificates in PX’s
certificate was not endorsed in favor of Steven name, and the issuance of new stock
(or anybody else for that matter), the only certificates in the names of his wife and his
conclusion could be no other than that the children as the new owners. The officers of the
shares in question still belong to Arnold. (BAR Corporation denied the request on the ground
1996) that another heir is contesting the validity of
the deed of assignment.

4. “A” is the registered owner of Stock

Certificate No. 000011. He entrusted the May the Corporation be compelled by
possession of said certificate to his best friend mandamus to register the shares of stock in the
“B” who borrowed the said endorsed certificate names of the assignees? Explain briefly.
 Answer: d) Yes, because the execution of the
Deed of Assignment of Shares of Stock is
Answer: Yes. The corporation may be compelled
equivalent to a lawful pledge of the shares of
by mandamus to register the shares of stock in
stock. (BAR 2013)
the name of the assignee. The only legal
limitation imposed by Section 63 of the
Corporation Code is when the Corporation
1.2. After Claude defaulted on the loan, Conrad
holds any unpaid claim against the shares
sought to have the shares registered in his
intended to be transferred. The alleged claim of
name in the books of the corporation. If you are
another heir of PX is not sufficient to deny the
the Corporate Secretary of ABC Corporation,
issuance of new certificates of stock to his wife
would you register the shares in the name of
and children. It would be otherwise if the
Conrad without any written instruction from
transferee’s title to the shares has no prima
Claude?
facie validity or is uncertain. (BAR 2004)

a) Yes, since the endorsement and delivery of

1. Claude, the registered stockholder of 1,000
the certificates of stock executed by Claude
shares in ABC Corp., pledged the shares to
constitute the legal authority to cancel the
Conrad by endorsement in blank of the covering
shares in his name and to place them in
stock certificates and, execution of a Deed of
Conrad’s name; b) Yes, since the execution of
Assignment of Shares of Stock, intended as
the Deed of Assignment by Claude would
collateral for a loan of P1 M that was also
constitute the legal authority to cancel the
supported by a separate promissory note.
shares in his name and place them in Conrad’s
name; c) No, because corporate officers can
only take direct instructions from the registered
1.1. Under these facts, is there a valid pledge of
owners on the proper disposition of shares
the shares of stock to Conrad?
registered in their names; d) No, because the
corporation has a primary lien on the shares
covering the unpaid subscription.
a) No, because shares of stocks are intangible
personal properties whose possession cannot
be delivered and, hence, cannot be the subject
Answer:
of a pledge; b) No, because the pledge of shares
of stock requires double registration with the Page | 264
Register of Deeds of the principal place of
business of the corporation and of the
residence of the pledgor; c) Yes, because None of the answers is correct. The pledge must
endorsement and delivery of the certificates of be foreclosed. Conrad cannot just appropriate
stock is equivalent to the transfer of possession the shares of stock. (BAR 2013)
of the covered shares to the pledge. d) Yes,
because the execution of the Deed of
Assignment of Shares of Stock is equivalent to a g. Involuntary Dealings with Shares
lawful pledge of the shares of stock.
L. Dissolution and Liquidation
 Explain your answer. b) What are the legal
requirements in order that a corporation may
1. The SEC approved the amendment of the
be dissolved?
articles of incorporation of GHQ Corporation
shortening its corporate life to only 25 years in
accordance with Section 120 of the Corporation
Answer: a) No, the sale of all the assets and
Code. As shortened, the corporation continued
liabilities of AAA Corporation to BBB Banking
its business operations until May 30, 1997, the
Corporation will not result in the automatic
last day of its corporate existence. Prior to said
dissolution or termination of the existence of
date, there were a number of pending civil
the former. A decision to dissolve AAA
actions, of varying nature but mostly money
Corporation or to terminate its corporate
claims filed by creditors, none of which was
existence would require a separate approval by
expected to be completed or resolved within 5
a majority of the Board of Directors of AAA
years from May 30, 1997.
Corporation and its stockholders holding at
least 2/3 of the total outstanding capital stock,
as well as the separate approval by the
If the creditors had sought your professional
Monetary Board.
help at that time about whether or not their
cases could be pursued beyond May 30, 1997,
what would have been your advice?
b) A corporation may be dissolved voluntarily
under Section 118 (where no creditors are
affected) or under Section 119 (where creditors
Answer: The cases can be pursued even beyond
are affected) or by shortening of the corporate
May 30, 1997, the last day of the corporate
term under Section 120, or involuntarily by the
existence of GHQ Corporation. The Corporation
SEC under Section 122, all of the Corporation
is not actually dissolved upon the expiration of
Code. Dissolution under Sections 118, 119, and
its corporate term. There is still the period for
120 require the same corporate approvals
liquidation or winding up. (BAR 2000)
stated in (a) above.

2. AAA Corporation is a bank. The operations of

The SEC has the authority under Section 6 of PD
AAA Corporation as a bank were not doing well.
902-A to revoke the certificate of registration of
So, to avert any bank run, AAA Corporation,
a corporation upon any grounds provided by
with the approval of the Monetary Board, sold
law, including the aforementioned Section 6-A.
all its assets and liabilities to BBB Banking
(BAR 2012)
Corporation which includes all deposits
accounts. In effect then, BBB Corporation will
service all deposits of AAA Corporation.

1. Modes of Dissolution
a) Will the sale of all assets and liabilities of AAA
Corporation to BBB Banking Corporation
automatically dissolve or terminate the Page | 265
corporate existence of AAA Corporation?
1. Name 3 methods by which a stock still within the period allowed by the lease
corporation may be voluntarily dissolved. contract for the extension of the lease period,
Explain each method. XYZ Corp. notified ABC Inc., that it is exercising
the option to extend the lease. ABC Inc.
objected to the proposed extension, arguing
Answer: The 3 methods by which a stock that since the corporate life of XYZ Corp. had
corporation may be voluntarily dissolved are: expired, it could no longer opt to renew the
lease. XYZ Corp. countered that withstanding
the lapse of its corporate term it still has the
a. Voluntary dissolution where no creditors are right to renew the lease because no quo
affected. This is done by a majority vote of the warranto proceedings for involuntary
directors, and resolution of at least 2/3 vote of dissolution of XYZ Corp. has been instituted by
stockholders, submitted to the SEC. the Office of the Solicitor General.

b. Voluntary dissolution where creditors are Is the contention of XYZ Corp. meritorious?
affected. This is done by a petition for Explain briefly.
dissolution which must be filed with the SEC,
signed by a majority of the members of the
board of directors, verified by the president or Answer: XYZ Corporation’s contention is not
secretary, and upon affirmative vote of meritorious. Based on the ruling of the Supreme
stockholders representing at least 2/3 of the Court in Philippine National Bank v. CFI of Rizal,
outstanding capital stock. 209 SCRA (1992). XYZ Corp. was dissolved ipso
facto upon the expiration of its original term. It
ceased to be a body corporate for the purpose
c. Dissolution by shortening of the corporate of continuing the business for which it was
term. This is done by amendment of the articles organized, except only for purposes connected
of incorporation. (BAR 2002) with its winding up or liquidation. Extending the
lease is not an act to wind up or liquidate XYZ
Corp.’s affairs. It is contrary to the idea of
a. Voluntary i. Where No Creditors Are Affected winding up the affairs of the corporation. (BAR
ii. Where Creditors Are Affected iii. By 2004)
Shortening of Corporate Term

b. Involuntary i. By Expiration of Corporate 2. The term of GGG Corporation in accordance

Term with its Articles of Incorporation ended last
January 30, 2012. The term was not extended.
What will happen to the corporation?
1. XYZ Corporation entered into a contract of
lease with ABC, Inc., over a piece of real estate
for a term of 20 years, renewable for another a) The corporation is dissolved ipso facto; b)
20 years, provided that XYZ’s corporate term is There is a need to pass a board resolution to
extended in accordance with law. Four years formally dissolve the corporation; c) The Board
after the term of XYZ Corporation expired, but of Directors must pass a resolution for the
corporation to formally go into liquidation; d) iii. Legislative Dissolution iv. Dissolution by the
The stockholders must pass a resolution to SEC on Grounds under Existing Laws
dissolve the corporation.
2. Methods of Liquidation
Page | 266
a. By the Corporation Itself

1. “X” Corporation shortened its corporate life

by amending its articles of incorporation. It has
no debts but owns a prime property located in
Answer: a) The corporation is dissolved ipso
Quezon City. How would the said property be
facto. (BAR 2012)
liquidated among the five stockholders of said
corporation? Discuss two methods of
liquidation
ii. Failure to Organize and Commence Business
Within 2 Years from Incorporation
Answer: The prime property of “X” Corporation
can be liquidated among the five stockholders
1. In the articles of incorporation of T after the property has been conveyed by the
Corporation, 11 members were named to corporation to the five stockholders, by dividing
constitute the board of directors. These 11 or partitioning it among themselves in any two
elected from among themselves a secretary- of the following ways:
treasurer but did not elect a president. The
board used to hold meetings to transact
business which was done through the secretary-
1. By physical division or partition based on the
treasurer. In a proceeding to forfeit its charter,
proportion of the values of their stockholdings;
the question was posed as to whether the
or 2. Selling the property to a third person and
corporation may be considered to have formally
dividing the proceeds among the five
organized. Resolve the question.
stockholders in proportion to their
stockholdings; or 3. After the determination of
the value of the property, by assigning or
Answer: Yes, the T Corporation may be transferring the property to one stockholder
considered to have formally organized. It with the obligation on the part of said
appearing that the corporation, from the very stockholder to pay the other four stockholders
day of its formation, had its governing board, the amount/s in proportion to the value of the
which directed its affairs, as well as a treasurer stockholding of each. (BAR 2001)
and clerk, and that, through these
instrumentalities, it actually functioned and
engaged in the business for which it was
b. Conveyance to a Trustee within a Three-Year
organized, said corporation cannot be held to
Period c. By Management Committee or
have forfeited its charter simply because it has
Rehabilitation Receiver d. Liquidation after
no president. (Perez v. Balamaceda, 40 Off.
Three Years
Gaz., 5th, Suppl. 196) (BAR 1979)
Page | 267
1. On February 15, 1970, “Acme Corporation” and against it and of enabling it to settle and
filed a complaint for collection against “D”. close its affairs, culminating in the final
While the case was pending, “Acme disposition and distribution of its remaining
Corporation” amended its Articles of assets. If the 3-year extended life expires
Incorporation to shorten its term of existence without a trustee or receiver being designated
up to December 31, 1970. The SEC approved by the corporation within that period and by
the amendment. that time (expiry of the 3-year extended term),
the corporate liquidation is not yet over, how, if
at all, can a final settlement of the corporate
The Trial Court, however, was not notified affairs be made?
thereof, so that proceedings therein continued
until May 5, 1974, when “D” learning of the
dissolution, questioned the personality of the Answer: The liquidation can continue with the
corporation to continue prosecuting the case. winding up. The members of the Board of
“D” alleged that since the corporation had Directors can continue with the winding of the
already been dissolved but had not taken steps corporate affairs until final liquidation. They can
to wind up its affairs and transfer its assets to a act as trustees or receivers for this purpose.
trustee or assignee within the 3-year period as (BAR 1997)
provided under Secs. 77 and 78 of the
Corporation Law (now Sec. 122 of the
Corporation Code), it had ceased to exist for all
purposes.
M. Other Corporations

1. Close Corporations
Decide the case, with reasons.
a. Characteristics of a Close Corporation

1. Ten classmates, all graduates of Class ’78 of

Answer: “D’s” allegation is untenable. Where a the Los Banos School of Agriculture and
corporation was dissolved during the pendency Husbandry, decided to form “Gatas Atbp., Inc.”,
of an action in court and the 3 years passed the principal purpose of which is to produce,
already after said dissolution, having no trustee package, and sell carabao’s milk. The Articles of
appointed according to law (Sec. 122, Incorportation provided, among others, that the
Corporation Code), its counsel who prosecuted business of the corporation shall be managed
and represented the interest of the corporation by the stockholders of the corporation rather
may be considered a trustee of said corporation than by a board of directors and restricts the
may be considered a trustee of said transfer of shares to outsiders.
corporation, at least to the matter in litigation,
to continue the said litigation. (Gelano v. Court
of Appeals, L-39050, Feb. 24, 1981) (BAR 1981) One of the ten classmates, Mr. Sakit-ulo,
disgruntles at the way the affairs of the
corporation was being handled, demanded that
2. The corporation, once dissolved, thereafter all the ten stockholders meet to elect directors,
continues to be a body corporate for 3 years for citing Section 50 of the Corporation Code.
purposes of prosecuting and defending suits by Meanwhile, Sakit-tiyan, sued all the ten
classmates-stock-holders for damages for 1. Rafael inherited from his uncle 10,000 shares
violation of the Food, Drugs Cosmetics Act– a of Sta. Ana Corporation, a close corporation.
cockroach was found in the milk she drank, the The shares have a par value of P10.00 per
package bearing the inscription “produced, share. Rafael notified Sta. Ana that he was
packaged and sold by Gatas Atbp., Inc.” selling his shares at P70 per share. There being
no takers among the stockholders, Rafael sold
the same to his cousin Vicente (who is not a
Page | 268 stockholder) for P700,000.

a) Can Mr. Sakit-ulo demand that a stockholders The Corporate Secretary refused to transfer the
meeting be called to elect directors of the shares in Vicente’s name in the corporate books
corporation? b) Does Ms. Sakit-tiyan have a because Alberto, one of the stockholders,
cause of action against all the ten classmates- opposed the transfer on the ground that the
stockholders, albeit no negligence has been same violated the by-laws. Alberto offered to
proven? buy the shares at P12.50 per share, as fixed by
the by-laws or a total price of P125,000 only.

Answer: a) “Gatas Atbp., Inc.” is a close

corporation, and its Articles of Incorporation While the by-laws of Sta. Ana provides that the
can, as it did, provide that the business of the right of first refusal can be exercised “at a price
corporation be managed by the stockholders not exceeding 25% more than the par value of
rather than by a board of directors. The such shares, the Articles of Incorporation simply
presence of this provision in the Articles of provides that the stockholders of record” shall
Incorporation, precludes Sakit-ulo from have preferential right to purchase the said
demanding that the stockholders meet in order shares.” It is silent as to pricing.
to elect directors of the company. b) Ms. Sakit-
tiyan has a cause of action against the
stockholders who, under the law, are deemed Answer: Yes. In a close corporation, the
to be directors and subject to liabilities as such. restriction as to the transfer of shares has to be
Said stockholders are made personally liable for stated/ annotated in the Articles of
corporate torts unless the corporation has Incorporation, the By-Laws and the certificate
obtained reasonably adequate liability of stock. This serves as notice to the person
insurance. Negligence need not be proven to dealing with such shares like Rafael in this case.
warrant liability by manufacturers of foodstuffs With such notice, he is bound by the pricing in
for death or injury caused by any obnoxious or the By-Laws. (BAR 1994)
harmful substance used. (BAR 1988)

b. Validity of Restrictions on Transfer of Shares

d. When Board Meeting is Unnecessary or
c. Issuance or Transfer of Stock in Breach of
Improperly Held e. Pre-Emptive Right f.
Qualifying Conditions
Amendment of Articles of Incorporation g.
Deadlocks
Page | 269 5 and no more than 15; d) Not less than 5 nor
more than 10 in multiples of 5.

1. Robert, Rey and Ben executed a joint venture

agreement to form a close corporation under Answer: c) Any number in multiples of 5, for as
the Corporation Code the outstanding capital long as it is not less than 5 and no more than
stock of which the 3 of them would equally 15. (BAR 2012)
own. They also provided therein that any
corporate act would need the vote of 70% of
the outstanding capital stock. The terms of the
agreement were accordingly implemented and
the corresponding close corporation was a. Definition b. Purposes c. Treatment of Profits
incorporated. After 3 years, Robert, Rey and 1. The AB Memorial Foundation, Inc. was
Ben could not agree on the business in which to incorporated as a non-profit, non-stock
invest the funds of the corporation. Robert corporation in order to establish and maintain a
wants the deadlock broken. library and museum in honor of the deceased
parents of the incorporators. Its Articles of
Incorporation provide for a board of trustees
1. What are the remedies available to Robert composed of the 5 incorporators, which is
under the Corporation Code to break the authorized to admit new members. The Articles
deadlock? Explain. 2. Are there any remedies to of Incorporation also allow the Foundation to
prevent the paralyzation of the business receive donations from members. As of January
available to Robert under PD 902-A while the 30, 1993, 60 members had been admitted by
petition to break the deadlock is pending the board of trustees.
litigation? Explain.

1. Can the Foundation use the funds donated to

Answer: 1. Robert can petition the SEC to it by its members for the purchase of food and
arbitrate the dispute, with such powers as medicine for distribution to the victims of the
provided in the Corporation Code. 2. The SEC Pinatubo eruption? 2. Can the Foundation
can appoint a rehabilitation receiver or a operate a specialty restaurant that caters to the
management committee. (BAR 1995) general public in order to augment its funds?

Answer: 1. Yes, Sec. 36 (9) of the Corporation

Code provides that as long as the amount of
2. Non-Stock Corporations
donation is reasonable.
1. The number of the Board of Trustees of a
non-stock, non-profit education institution be—
Page | 270

a) 5 only; b) Any number for as long as it is not

less than 5 and no more than 11; c) Any number 2. If the purposes of the corporation are limited
in multiples of 5, for as long as it is not less than to the establishment and maintenance of the
library and museum as stated in the problem, its members, without a prior dissolution of the
the foundation cannot operate a specialty corporation. Under Section 122, the non-stock
restaurant that caters to the general public. In corporation must be dissolved first. (BAR 2001)
such case, the action of the foundation will be
ultra vires. (BAR 1993)

d. Distribution of Assets upon Dissolution

3. Religious Corporations – Exclude

2. “X” company is a stock corporation
composed of the Reyes family engaged in real 1. Petitioner is a corporation sole organized and
estate business. Because of the regional crisis, existing in accordance with Philippine Laws,
the stockholders decided to convert their stock with Msgr. Trudeau, in a Canadian citizen, as
corporation into a charitable non-stock and actual incumbent. It presented for registration a
non-profit association by amending the articles deed of sale to the Register of Deeds of Cebu
of incorporation. who denied it for lack of proof that at least 60%
of the capital, property or assets of the
corporation sole is owned or controlled by
c) Could this be legally done? Why? d) Would Filipino citizens.
your answer be the same if at the inception, “X”
company is a non-stock corporation? Why?
Was the action of the Register of Deeds
correct? Give reasons for your answer?
Answer: c) Yes, it can be legally done. In
converting the stock corporation to a non-stock
corporation by a mere amendment of the Answer: No. the action of the Register of Deeds
Articles of Incorporation, the stock corporation was not correct. The requirement of at least
is not distributing any of its assets to the 60% of Filipino capital was never intended to
stockholders. On the contrary, the stockholders apply to corporations sole, because:
are deemed to have waived their right to share
in the profits of the corporation which is a gain
not a loss to the corporation. (1) Corporation sole is composed of only
person; (2) The corporation sole is only the
administrator and not the owner of the
d) No, my answer will not be the same. In a temporalities; (3) Said temporalities belong to
non-stock corporation, the members are not the faithful; and (4) Corporation sole has no
entitled to share in the profits of the nationality. (Roman Catholic Apostolic Adm. Of
corporation because all present and future Davao, Inc. v. Land Reg. Co., G.R. L-8451,
profits belong to the corporation. In converting December 20, 1957) (BAR 1978)
the non-stock corporation to a stock
corporation by a mere amendment of the
Articles of Incorporation, the non-stock 2. What is a corporation sole?
corporation is deemed to have distributed an
asset of the corporation—i.e. its profits, among
Answer: Section 10 of the Corporation Code 4. Foreign Corporations
defines a “corporation sole” as one formed for
a. Bases of Authority over Foreign Corporations
the purpose of administering and managing, as
trustee, the affairs, property and temporalities i. Consent ii. Doctrine of “Doing Business”
of any religious denomination, sect or church. (related to definition under the Foreign
Investments Act, R.A. No. 7042)
Page | 271
1. When is a foreign corporation deemed to be
“doing business in the Philippines?”
It is formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder
of such religious denomination, sect or church. Answer: A foreign corporation is deemed to be
(BAR 2004) “doing business in the Philippines” if it is
continuing the body or substance of the
business or enterprise for which it was
3. Father X, an American priest who came from organized.
New York, registered the Diocese of Bacolod of
the Roman Catholic Church which was
incorporated as a corporation sole. There were It is the intention of an entity to continue the
years when the head of the Diocese was a body of its business in the country. The grant
Filipino, but there were more years when the and extension of 90day credit terms by a
heads were foreigners. Today, the head is an foreign corporation to a domestic corporation
American again. Y donated a piece of land for every purchase shows an intention to
located in Bacolod City for use as a school. continue transacting with the latter (BAR 1998)
Which statement is most accurate?

2. A. What is the legal test for determining if an

a) The Register of Deed of Bacolod City can unlicensed foreign corporation is doing business
refuse to register and transfer the title because in the Philippines?
the present head of the corporation sole is not
a Filipino; b) The nationality of a corporation
sole depends upon the nationality of the head B. Give at least 3 examples of the acts or
at any given time; c) A corporation sole, activities that are specifically identified under
regardless of the nationality of the head, can our foreign investment laws as constituting
acquire real property either by sale or donation; “doing business” in the Philippines.
d) A corporation sole is not legally allowed to
own real property.
Answer: A. The test is whether or not the
unlicensed foreign corporation has performed
Answer: c) A corporation sole, regardless of the an act or acts that imply a continuity of
nationality of the head, can acquire real commercial dealings or arrangements, and
property either by sale or donation. (BAR 2012) contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, commercial gain or traveled outside the Philippines. After a series
of the purpose and object of the business of erroneous stock picks, she had incurred a net
organization. indebtedness of US$30,000 with EOL, at which
time she cancelled her American Express credit
card. After a number of demand letters sent to
Page | 272 Grace, all of them unanswered, EOL, through a
Makati law firm, filed a complaint for collection
against Grace with the RTC of Makati. Grace,
B. Any three of the following acts or activities through her lawyer, filed a motion to dismiss on
constitute “doing business” in the Philippines the ground that EOL (a) was doing business in
under our foreign investment laws: the Philippines without a license and was
therefore barred from bringing suit and (b)
violated the SRC by selling or offering to sell
1. Soliciting orders 2. Opening offices by securities within the Philippine SEC and thus
whatever name 3. Participating in the came to court “with unclean hands”. EOL
management, supervision or control of any opposed the motion to dismiss, contending that
domestic entity 4. Entering into service it had never established a physical presence in
contracts 5. Appointing representatives or the Philippines, and that all of the activities
distributor, operating under the control of the related to plaintiffs trading in U.S. securities all
foreign entity, who is domiciled in the transpired outside the Philippines. If you are the
Philippines or who stays in the country for a judge, decide the motion to dismiss by ruling on
period totaling at least 180 days in any calendar the respective contentions of the parties on the
year. (BAR 2002) 3. Equity Online Corporation basis of the facts presented above.
(EOL), a New York corporation, has a securities
brokerage service on the Internet after
obtaining all requisite U.S. licenses and permits Answer: 1) The grounds of the motion to
to do so. EOL’s website (www.eonline.com), dismiss are both untenable. EOL is not doing
which is hosted by a server in Florida, enables business in the Philippines, and it did not violate
Internet users to trade on-line in securities the Securities Act, because it was not selling
listed in the various stock exchanges in the U.S. securities in the country.
EOL buys and sells U.S.-listed securities for the
accounts of its clients all over the world, who
convey their buy and sell instructions to EOL 2) The contention of EOL is correct, because it
through the Internet. EOL has no offices, never did any business in the Philippines. All its
employees or representatives outside the U.S. transactions in question were consummated
The website has icons for many countries, outside the Philippines (BAR 2002)
including an icon “For Filipino Traders”
containing the day’s prices of U.S.—listed
securities expressed in U.S. dollars and in their 4. Gawsengsit Corp. is a corporation
Philippine peso equivalent. Grace Gonzales, a incorporated in Singapore. It invested in
resident of Makati, is a regular customer of the Bumblebee Corp., a Philippine corporation, by
website and has been purchasing and selling acquiring 30% of its shares. As a result,
securities through EOL with the use of her Gawsengsit Corp. nominated 30% of the
American Express credit card. Grace has never directors of the Bumblebee Corp., all of whom
are Singaporeans and officers of Gawsensit anyone anymore. Which statement is the most
Corp. accurate?

Choose the correct statement relating to a) This can be a ground for revocation or
Gawsengsit Corp. suspension of its license to do business; b)
There is no more effect in the license because
anyway at the time of registration, a resident
a) Gawsengsit Corp. is doing business in the agent was appointed; c) This can be a ground
Philippines and requires a license from the SEC; for suspension only; d) This will result in
b) Gawsengsit Corp. is not doing business in the automatic revocation of its license to do
Philippines by its mere investment in a business in the Phiippines.
Philippine corporation and does not need a
license from the SEC; c) Gawsengsit Corp. has to
appoint a resident agent in the Philippines; d) Answer: a) This can be a ground for revocation
Gawsengsit Corp. cannot elect directors in or suspension of its license to do business. (BAR
Bumblebee Corp.; e) All of the above choices 2012)
are incorrect.

c. Personality to Sue
Answer:
1. “G” Corporation, organized under Philippine
Page | 273 laws is the owner of the trademark “Jumbo”
under Registry No. 50025 issued on February
15, 1979 by the Philippine Patent Office, for
b) Gawsengsit Corp. is not doing business in the assorted kitchen ware. On June 10, 1980, the
Philippines by its mere investment in a Jumbo Cookware Corporation, organized and
Philippine corporation and does not need a existing under the U.S. laws, filed a petition with
license from the SEC. (BAR 2013) the Philippine Patent Office for the cancellation
of the trademark “Jumbo” registered in the
name of “G” Corporation alleging ownership
b. Necessity of a License to Do Business and prior use in the Philippines since 1949 of
said trademark on the same kind of goods,
i. Requisites for Issuance of a License ii. which use it had not abandoned.
Resident Agent

“G” Corporation moved to dismiss the petition

1. AAA Corporation is a foreign corporation that alleging that the Jumbo Cookware Corporation,
wants to operate a representative office in the being foreign entity, which is not licensed to do
Philippines. As required by the Corporation and is not doing business in the Philippines has
Code, there is a need to appoint a Resident no personality under the Philippine laws to
Agent as a condition precedent to the issuance maintain such petition.
of a license to transact business in the
Philippines. After 2 years, AAA Corporation
removed its Resident Agent and did not appoint
Is “G’s” contention meritorious? Who is entitled Jumbo Cookware Corporation of U.S.A. is
to the use of the trademark “Jumbo”? entitled to use of the trademark “Jumbo” for
being the first user of said trademark in the
Philippines. (Asri Yoko Co., Ltd., v. Kee Boc, Jan.
Explain each of your answers. 20, 1961; 1 SCRA 1). Also, it is well settled that
one may be declared unfair competitor even if
his competing mark is registered. (Parke, Davis
Answer: “G’s” contention is not meritorious. & Co. v. Kiu Foo & Co., 60 Phil. 928) (BAR 1981)
First alternative reason—A foreign corporation
is not transacting business in the Philippines
may sue in the Philippines (Pacific Vegetable Oil
Corp. v. Singzon, Apr. 29, 1965); thus, it is well
2. In 1979, Smash Manufacturing Company, a
settled that if a foreign corporation is not
foreign corporation registered in New York, but
engaged in business in the Philippines, it may
not doing business in the Philippines, filed a
not be denied the right to file an action in the
complaint for unfair competition against Nilo
Philippine Courts (Aetna Casualty & Surety Co.
Malakas. The plaintiff alleged that since 1939, it
v. Pacific Star Line, Dec. 29, 1977; 80 SCRA 635).
had been exporting tennis rackets under the
Since Jumbo Cookware Corporation is not
trademark “Smash Mfg. Co.”, and that after the
transacting business in the Philippines but
trademark and tradename became familiar to
merely exporting its goods to the Philippines;
Filipino consumers, defendant Malakas began
therefore, its trademark shall be protected also
manufacturing similar products under the same
in the Philippines. (Western Equipment &
trademark and tradename which he registered
Supply Co. v. reyes, 51 Phil 115).
with the Philippine Patent Office. Actually, after
1948, Smash Tennis rackets produced by the
foreign corporation were no longer imported in
Page | 274 the Philippines.

Second alternative reason—Under the The complaint failed to allege that its trademark
Trademark Law, a foreign corporation may or tradename has been registered with the
bring an action for unfair competition in the Philippine Patents Office or that the State of
Philippines, whether or not it has been licensed New York grants Philippine corporations the
to do business in the Philippines, provided that privilege to bring an action for unfair
the country of which the said foreign competition in that State. Claiming that these
corporation is a citizen or in which it is are conditions sine qua non before a foreign
domiciled, by treaty or law grants a similar corporation may file suit in the Philippines,
privilege to corporation of the Philippines; and defendant Malakas filed a motion to dismiss the
this is granted in the “Convention of Paris” and complaint.
by law in the United States of America.
(Converse Rubber Corp. v. Jacinto Rubber and
Plastics Co. Inc., April 28, 1980; 97 SCRA 158)
a) How would you decide the motion to
dismiss? State your reasons.
Answer: a) The motion of Malakas to dismiss defendant has registered with the Philippine
the complaint of Smash Manufacturing Patent Office the trademark “Prince”, which
Company shall be sustained. A foreign registration is contrary to Sec. 4 of RA 166, as
corporation may bring an action for amended, and violative of plaintiff’s right to the
infringement or unfair competition, provided as trademark “Prince”; that the defendant not
conditions sine qua non that the trademark or only uses the trademark “Prince” but likewise
tradename of the suing foreign corporation be has copied the design used by plaintiff in
registered in the Philippine Patent Office or, in distinguishing its trademark; and that the use
the least, that it be an assignee of such thereof by defendant on its
registered trademark or tradename, and that
Page | 275
the country of which the plaintiff foreign
corporation is a citizen or domicillary, grants to
Filipino corporation the same reciprocal
treatment, either thru treaty, convention or products would cause confusion in the minds of
law. But said conditions sine qua non were not the consumers and likely deceive them as to the
even stated in the complaint of the plaintiff. (BA source or origin of the goods, thereby enabling
1982) the defendant to pass off their products as
those of plaintiff.

3. Prince Manufacturing Co., Inc. filed a

complaint for unfair competition under section Invoking the provisions of Sec. 21 A of RA 166,
21-A of R.A. 166 against Prince Industries, Inc. as amended, plaintiff prayed for damages. It
the complaint substantially alleges that plaintiff also sought the issuance of a writ of injunction
is a foreign corporation organized under the to prohibit defendants from using the
laws of California, USA., with offices in San tradename “Prince Industries Co.” and the
Francisco; that defendant Prince Industries, Inc. trademark “Prince”.
is a corporation organized under the laws of the
Philippines with principal office at Sucat Road,
Paranaque, Metro Manila; that plaintiff, a) If you were the counsel for the defendant
founded in 1920 by Iver Prince, is the largest Prince Industries Co., what grounds would you
manufacturer of ball bearings with the invoke to have the complaint dismissed?
trademark “Prince” and the tradename “Prince
Manufacturing Co., Inc.” had been exported to
the Philippines since 1960; that due to the Answer: a) Defendant should file a motion to
superior quality and widespread use of its dismiss for failure to state a cause of action,
products by the public, the same are well drawing attention to plaintiff’s failure to allege
known to Filipino consumers under the in the complaint its capacity to sue.
tradename “Prince Manufacturing Industries,
Inc.” and trademark “Prince”; that long after the
commencement of the use of plaintiff’s Plaintiff cannot sue under Section 21-A of RA
trademark and tradename in the Philippines, 166 because it has not complied with the
defendant began manufacturing and selling ball requirement that (1) its trademark has been
bearings under the trademark “Prince” and registered with the Patent Office or in the least,
tradename “Prince Industries, Co.”; that that plaintiff is the assignee of such registered
trademark and (2) that the country of which the Without an appropriate license, a foreign
foreign corporation is a citizen or domiciliary corporation engaged in business in the
grants to Filipino corporations the same Philippines cannot sue judicially or
reciprocal treatment, either thru treaty, administratively. (BAR 1987)
convention, or law, to bring an action for unfair
competition.
d. Suability of Foreign Corporations

1. After disposing of his last opponent in only

The mere allegation by the plaintiff that it is a
two rounds in Las Vegas, the renowned boxer
foreign corporation is not sufficient. Such bare
Sonny Bachao arrived at the NAIA met by
averment not only fails to comply with Section
thousands of hero-worshipping fans and
21-A but violates as well the directive of Section
hundreds of media photographers. The
4, Rule 8 of the Rules of Court that “facts
following day, a colored photograph of Sonny
showing the capacity of a party to sue and be
wearing a black polo short embroidered with
sued in a representative capacity or the legal
the 2inch Lacoste crocodile logo appeared on
existence of an organized association of persons
the front page of every Philippine newspaper.
that is made a party, must be averred.” (Levitan
Industries v. Salvador, 114 SCRA 420 [1982])
(BAR 1984)
Lacoste International, the French firm that
manufactures Lacoste apparel and owns the
Lacoste trademark, decided to cash in on the
5. Okura International, Ltd. (OIL), a Japanese
universal popularity of the boxing icon. It
company, obtained a license from the SEC to set
reprinted the photographs, with the permission
up a regional headquarters in the Philippines.
of the newspaper publishers, and went on a
OIL has a substantial investment in a Philippine
world-wide blitz of print commercials in which
joint venture company, JAPIL, Inc., which OIL
Sonny is shown wearing a Lacoste shirt
manages under an existing management
alongside the phrase “Sonny Bachao just loves
contract. In fact, the Manager of OIL’s regional
Lacoste”.
office in Manila doubles as the General
Manager of JAPIL. Because of an intracorporate Page | 276
dispute in JAPIL, OIL filed suit before the
Philippine SEC against its fellow stockholders in
JAPIL.

When Sonny sees the Lacoste advertisements,

Will such suit prosper? Reasons. he hires you as a lawyer and asks you to sue
Lacoste International before a Philippine court:

Answer: The suit will not prosper. Under R.A.

5455, OIL would be prohibited from entering a) XXX
into a management contract without having the
license therefore. The license that OIL had
obtained from the SEC was merely for setting b) XXX
up regional headquarters in the Philippines.
c) XXX e. Instances When Unlicensed Foreign
Corporations May Be Allowed to Sue Isolated
Transactions
d) Can Lacoste International validly invoke the
1. “G” Corporation, organized under Philippine
defense that it is not a Philippine company and,
laws is the owner of the trademark “Jumbo”
therefore, Philippine courts have no
under Registry No. 50025 issued on February
jurisdiction? Explain.
15, 1979 by the Philippine Patent Office, for
assorted kitchen ware. On June 10, 1980, the
Jumbo Cookware Corporation, organized and
Answer: No. Philippine courts have jurisdiction existing under the U.S. laws, filed a petition with
over it, if it is doing business in the Philippines. the Philippine Patent Office for the cancellation
Moreover, under Section 133 of the of the trademark “Jumbo” registered in the
Corporation Code, while a foreign corporation name of “G” Corporation alleging ownership
doing business in the Philippines without and prior use in the Philippines since 1949 of
license to do business, cannot sue or intervene said trademark on the same kind of goods,
in any action, it may be sued or proceeded which use it had not abandoned.
against before our courts or administrative
tribunal. (BAR 2009)
“G” Corporation moved to dismiss the petition
alleging that the Jumbo Cookware Corporation,
2. South China Airlines is a foreign airline being foreign entity, which is not licensed to do
company. South China Airlines tickets are sold and is not doing business in the Philippines has
in the Philippines though PAL as their general no personality under the Philippine laws to
agent. South China Airlines is not registered to maintain such petition.
do business as such with the Philippine SEC.
which statement is most accurate?
a) Is “G’s” contention meritorious?

a) Although unlicensed to do business in the

Philippines, South China Airlines can sue before
Answer: “G’s” contention is not meritorious.
the Philippine Courts and can also be sued; b)
First alternative reason—A foreign corporation
South China Airlines can sue but cannot be
is not transacting business in the Philippines
sued; c) South China Airlines cannot sue and
may sue in the Philippines (Pacific Vegetable Oil
cannot be sued also; d) South China Airlines can
Corp. v. Singzon, Apr. 29, 1965); thus, it is well
be sued in the Philippine Courts but it cannot
settled that if a foreign corporation is not
sue.
engaged in business in the Philippines, it may
not be denied the right to file an action in the
Philippine Courts (Aetna Casualty & Surety Co.
Answer: d) South China Airlines can be sued in v. Pacific Star Line, Dec. 29, 1977; 80
the Philippine Courts but it cannot sue. (BAR
2012) Page | 277
SCRA 635). Since Jumbo Cookware Corporation New York grants Philippine corporations the
is not transacting business in the Philippines but privilege to bring an action for unfair
merely exporting its goods to the Philippines; competition in that State. Claiming that these
therefore, its trademark shall be protected also are conditions sine qua non before a foreign
in the Philippines. (Western Equipment & corporation may file suit in the Philippines,
Supply Co. v. reyes, 51 Phil 115). defendant Malakas filed a motion to dismiss the
complaint.

Second alternative reason—Under the

Trademark Law, a foreign corporation may b) How would you decide the motion to
bring an action for unfair competition in the dismiss? State your reasons.
Philippines, whether or not it has been licensed
to do business in the Philippines, provided that
the country of which the said foreign Answer: b) The motion of Malakas to dismiss
corporation is a citizen or in which it is the complaint of Smash Manufacturing
domiciled, by treaty or law grants a similar Company shall be sustained. A foreign
privilege to corporation of the Philippines; and corporation may bring an action for
this is granted in the “Convention of Paris” and infringement or unfair competition, provided as
by law in the United States of America. conditions sine qua non that the trademark or
(Converse Rubber Corp. v. Jacinto Rubber and tradename of the suing foreign corporation be
Plastics Co. Inc., April 28, 1980; 97 SCRA 158) registered in the Philippine Patent Office or, in
(BAR 1981) the least, that it be an assignee of such
registered trademark or tradename, and that
the country of which the plaintiff foreign
2. In 1979, Smash Manufacturing Company, a corporation is a citizen or domicillary, grants to
foreign corporation registered in New York, but Filipino corporation the same reciprocal
not doing business in the Philippines, filed a treatment, either thru treaty, convention or
complaint for unfair competition against Nilo law. But said conditions sine qua non were not
Malakas. The plaintiff alleged that since 1939, it even stated in the complaint of the plaintiff.
had been exporting tennis rackets under the (BAR 1982)
trademark “Smash Mfg. Co.”, and that after the
trademark and tradename became familiar to
Filipino consumers, defendant Malakas began f. Grounds for Revocation of License
manufacturing similar products under the same
trademark and tradename which he registered N. Mergers and Consolidations
with the Philippine Patent Office. Actually, after
1948, Smash Tennis rackets produced by the
foreign corporation were no longer imported in 1. XXX Bank Corporation and ZZZ Corporation
the Philippines. were merged into XX ZZ Bank Corporation. So as
not to create any unnecessary conflict, all the
former directors of both banks wanted to be
The complaint failed to allege that its trademark appointed/elected as members of the Board of
or tradename has been registered with the Directors of the merged bank. Each bank used
Philippine Patents Office or that the State of to have 11 members of the board. The
maximum number of directors of the merged
bank is—
1. Limitations 2. Effects

1. Two corporations agreed to merge. They

a) 15; b) 22; c) 21; d) 11. then executed an agreement specifying the
surviving corporation and the absorbed
corporation. Under the agreement of merger
Answer: a) 21. (BAR 2012) dated November 5, 1998, the surviving
corporation acquired all the rights, properties
Page | 278 and liabilities of the absorbed corporation.

a) What would happen to the absorbed

1. Definition and Concept 2. Constituent vs. corporation? Must the absorbed corporation
Consolidated Corporation 3. Plan of Merger or undertake dissolution and the winding up
Consolidation 4. Articles of Merger or procedures? Explain your answer. b) Pending
Consolidation 5. Procedure 6. Effectivity the approval of the merger by the SEC, may the
surviving corporation already institute suits to
2. XXX Corporate and YYY Corporation have collect all receivables due to the absorbed
agreed to be merged into one corporation. To corporation from its customers? Explain your
facilitate the merger, both corporations agreed answer. c) A case was filed against a customer
that the merger be made effective on May 31, to collect on the promissory note issued by him
2012. The SEC approved the Articles of Merger after the date of the merger agreement. The
on June 30, 2012. Which statement is most customer raised the defense that while the
accurate? receivables as of the date of the merger
agreement were transferred to the surviving
corporation, those receivables which were
a) The effective date of merger is May 31, 2012, created after the merger agreement remained
the date stipulated by the parties as the to be owned by the absorbed corporation.
effective date; b) The effective date of the These receivables would be distributed to the
merger is always the date of the approval of the stockholders conformably with the dissolution
Articles of Merger by the SEC; c) The effective and liquidation procedures under the New
date of the merger would be the date approved Corporation Code? Discuss the merits of this
by the Board of Directors and the stockholders; argument.
d) The stockholders and the Board of Directors
can set the effective date of the merger anytime
after the approval of the SEC. Answer: a) No. There is no need for the
absorbed corporation to undertake dissolution
and winding up procedure. As a result of the
Answer: b) The effective date of the merger is merger, the absorbed corporation is
always the date of the approval of the Articles automatically dissolved and its assets and
of Merger by the SEC. (BAR 2012) liabilities are acquired and assumed by the
surviving corporation.
 “A” filed a motion to dismiss the case on the
ground that the controversy between him and
Page | 279
“XYZ” arose out of intracorporate relations
between stockholders, he being a stockholder
of “XYZ” already and, therefore, the controversy
b) No. The merger does not become effective is within the jurisdiction of SEC under P.D. No.
until and unless approved by the SEC. before 902-A.
the approval by the SEC of the merger, the
surviving corporation has no legal personality
with respect to receivables due to the absorbed
The court dismissed the case and directed the
corporation.
parties to ventilate their controversy before the
SEC.

c) Whether the receivable was incurred by the

absorbed corporation before or after the
Is the Order of the Court correct? Explain.
merger agreement, or before or after the
approval thereof by the SEC, the said receivable
would still belong to the surviving corporation
Answer: First Alternative Answer: The order of
under Section 80 of the Corporation Code which
the court is not correct. This is not a case of
does not make any distinction as to the assets
intra-corporate controversy within the
and liabilities of the absorbed corporation that
provisions of P.D. No. 902-A, since this is a case
the surviving corporation would inherit. (BAR
of “XYZ Corporation”, as owner of the
1999)
condominium in question, suing “A”, a buyer of
one unit on installment basis, for breach of the
contract to “Buy and Sell”, which is within the
jurisdiction of Courts of justice.
O. **JURISDICTION

1. Intra-corporate Controversies
Second Alternative Answer: The order of the
1. “XYZ” is a Condominium Corporation within court is not correct. “A” is not yet entitled to
the meaning of R.A. 4726, the Condominium the ownership of the unit he is buying, and
Law. It built condominium units within Manila therefore, he has yet no shares of stock on the
and offered the same for sale. “A” bought one condominium corporation of which his unit is a
unit on installment basis under a Contract to part (not “XYZ Condominium Corporation”), and
Buy and Sell, which provided that “A”, upon full therefore “A” may not be considered as a
payment of the contract price, shall be entitled stockholder even of the corporation of the
to the ownership of the unit so purchased and condominium property which he was buying a
to shares of stock pertaining thereto in the unit of. (BAR 1981)
condominium corporation. “A” defaulted in the
payment of his installments and “XYZ” filed a
case in Court for collection of overdue accounts. 2. ABC Corporation is engaged in the business of
manufacturing soft drinks. For the past 10
years, it has bought all its bottles from XYZ
Corporation. Considering the volume of its
production, it now finds that it will be more law, the SEC can issue injunctions, whether
economical to manufacture its own bottles. prohibitory or mandatory, in all cases in which it
has jurisdiction. The regular courts have
therefore no jurisdiction over the case. (BAR
The Board of Directors, after studying and 1983) (JURISDICTION NOW TRANSFERRED TO
discussing the matter thoroughly, decides to set RTC)
aside the amount of 1 Million for this project.
Most of this amount will go to the cost of
equipment and materials. 3. June Roco purchased from Maharlika
Subdivision a 1,000-sq.m. parcel of lot.
Annotated at the back of the Certificate of Title
M is a stockholder of ABC Corporation and is issued to him are restrictions regarding the
against this investment in the bottling project nature and specifications of the construction of
and would like to withdraw from the a residential house that may be constructed
corporation by exercising his appraisal right if thereon and a statement making the purchaser
the project goes through. He therefore an automatic member of Maharlika Village
demands that the project be submitted to the Association, a registered non-stock, non-profit
stockholders for approval, but the board refuses corporation. Two years thereafter, Roco applied
to do so on the ground that there is no need for for a building permit to construct a three-storey
such approval and that the calling of a special edifice on the said place. Upon being informed
stockholder’s meeting would entail too much and learning of the said construction, the
expenses. Maharlika Village Association advised him to
stop the said construction since it violated the
Page | 280 restrictions contained at the back of his title.
Despite said admonition, Roco proceeded with
the construction compelling Maharlika to file an
action before the RTC of the place for
M thus cannot have the opportunity to exercise “Injunction with Damages”.
his appraisal right. He wants to sue the board to
compel it to submit the matter to the
stockholders and to enjoin it from pursuing the Roco moved to dismiss on the ground that the
project until the stockholders shall have case is a corporate controversy which therefore
approved it. falls within the exclusive jurisdiction of the SEC
pursuant to Section 5 of PD 902-A.

b) Before whom should M file his suit? Why?

Resolve Roco’s motion to dismiss.

Answer: b) A should bring his case before the

SEC which, under PD 902-A, has original and Answer: June Roco’s motion to dismiss the
exclusive jurisdiction to hear and decide cases action filed against him in the RTC by the
involving controversies arising out of Maharlika Village Association, a registered non-
intracorporate relations between any stock and non-profit corporation of which June
stockholders and the corporation. Under this is a member, for “Injunction with Damages”, is
meritorious. The SEC has the original and Page | 281
exclusive jurisdiction to hear and decide the
said case, a controversy arising out of
intracorporate relations between a member
and the corporation. The question of damages
is merely incidental to the main issue. (BAR b) Would your answer be the same if A instead
1985) (JURISDICTION NOW TRANSFERRED TO sold his shares to his friend Mabel and the latter
RTC) filed a case with the RTC against the
corporation to compel it to register the sale and
to issue new certificates of stock in her name?
4. On December 6, 1988, A, an incorporator and
the General Manager of the PAJE Multi-Farms
Corp., resigned as General Manager and sold Answer: My answer would be the same. An
the corporation his shares of stocks in the action to compel a corporation to register a sale
corporation for P300,000, the book value and to issue new certificates of stock is itself an
thereof, payable as follows: (a) P100,000 as intracorporate matter exclusively lies with the
down payment; (b) P100,000 on or before SEC to take cognizance. (BAR 1991)
September 30, 1989. A promissory note, with
an acceleration clause, was executed by the
corporation for the unpaid balance. 5. Because of disagreement with the Board of
Directors and a threat by the Board to expel her
for misconduct and inefficiency, Carissa offered
The corporation failed to pay the first in writing to resign as President and Member of
installment on due date. A then sued PAJE the Board of Directors, and to sell to the
Mulit-Farms Corp. on the promissory note in company all her shares therein for P300, 000.
the RTC. Her offer to resign was “effective as soon as my
shares are fully paid”. At its meeting, the Board
of Directors accepted Carissa’s resignation,
approved her offer to sell back her shares of
a) Does said court have jurisdiction over the
stock to the company, and promised to buy the
case?
stocks on a staggered basis. Carissa was
informed of the Board Resolution in a letter
agreement to which she affixed her consent.
Answer: The RTC has no jurisdiction over the
The Company’s new President signed the
case. In Boman Environmental Development
promissory note. After paying P100, 000, the
Corporation v. Court of Appeals (G.R. No.
company defaulted in paying the balance of
77860, November 22, 1988), the Supreme Court
P200, 000.
observed that a corporation may only buy its
own shares of stock if it has enough surplus
profits therefor. On an issue involving the trust
Carissa wants to sue the Company to collect the
fund doctrine, the SEC would be in better
balance. If you were retained by Carissa as her
position than ordinary courts to make an
lawyer, where will you file the suit? (a) Labor
assessment and judgment on the matter.
Arbiter; (b) RTC; or (c) SEC?
Answer: a) No. the Labor Arbiter has no was a former stockholder of MFF Corporation
jurisdiction. This is not a labor case, involving and the controversy arose out of this relation.
employer-employee relationship. (BAR 1996)

b) No. The RTC has no jurisdiction over this case 7. In 1970, Magno joined AMD Corporation as a
which involves intra-corporate controversy. Junior Accountant. He steadily rose from the
ranks until he became AMD’s Executive VP.
Subsequently, however, because of his
c) Yes. The SEC has jurisdiction over this case. involvement in certain anomalies, the AMD
The case is between a stockholder and a Board of Directors considered him resigned
corporation of which he is a stockholder, and from the company due to loss of confidence.
the dispute arose out of such relationship.
Moreover, the question whether or not the
transaction falls under the right of appraisal so Page | 282
as to make the withdrawal legal, properly falls
under the SEC jurisdiction. (BAR 1994)
Aggrieved, Magno filed a complaint in the SEC,
questioning the validity of hi termination, and
6. Jennifer and Gabriel owned the controlling seeking reinstatement to his former position,
stocks in MFF Corporation and CLO, Inc., both with back wages, vacation and sick leave
family corporations. Due to serious benefits, 13th month pay and Christmas bonus,
disagreements, Jennifer assigned all her shares plus moral and exemplary damages, attorney’s
in MFF Corporation to Gabriel, while Gabriel fees and costs. AMD filed a motion to dismiss,
assigned all his shares in CLO, Inc. to Jennifer. arguing that the SEC has no jurisdiction over
Subsequently, Jennifer and CLO, Inc., filed a cases of illegal dismissal, and has no power to
complaint against Gabriel and MFF Corporation award damages.
in the SEC, seeking to recover the corporate
records and funds of CLO, Inc., which Gabriel
allegedly refused to turn over, and which Should the motion to dismiss be granted?
remained in the offices of MFF Corporation. Explain.

Is there an intra-corporate controversy in this Answer: The motion to dismiss should be

case? Explain. denied. The dismissal of Magno is a corporate
act as it resulted in his nonreelection to his
position, and his non-acceptance of such
Answer: Yes, there is an intra-corporate dismissal is an intra-corporate controversy. The
controversy in this case. The fact that, when the fact that Magno sought payment of his back
complaint against Gabriel and MFF Corporation wages and other benefits, as well as moral and
was filed with the SEC, Jennifer and CLO, Inc. exemplary damages and attorney’s fees in his
were no longer stockholders of MFF complaint for illegal dismissal, does not operate
Corporation did not divest the SEC of its to prevent the SEC from exercising its
jurisdiction over the case inasmuch as Jennifer jurisdiction under PD 902-A. While the
affirmative reliefs and monetary claims sought controversy. b) If there is no over-issuance of
by Magno may, at first glance, mislead one into shares resulting from the two transactions of
placing the case under the jurisdiction of the Juan, the corporation should recognize both
Labor Arbiter, a closer examination reveals that Pedro and Jose as rightful stockholders. This is
they are actually part of the prerequisites of his without prejudice to the right of the
elective position, hence, intimately linked with corporation to claim against Juan for the value
his relations with the corporation. (BAR 1996) of the shares which Juan sold to Jose. (BAR
1997)

8. Juan was a stockholder of X Corporation. He

owned a total of 500 shares evidenced by 9. What is an intra-corporate controversy?
Certificate of Stock No. 1001. He sold the shares
to Pedro. After getting paid, Juan indorsede and
delivered said certificate of Stock No. 1001 to Answer: An intra-corporate controversy is a
Pedro. The following day, Juan went to the dispute between a stockholder and the
offices of the corporation and claimed that his corporation of which he is a stockholder, or
Certificate of Stock No. 1001 was lost and that, between a stockholder and another stockholder
despite diligent efforts, the certificate could not of the same corporation, where the subject of
be located. The formalities prescribed by law the dispute or controversy arose out of such
for the replacement of the “lost” certificate, relationship. (BAR 2006)
Certificate of Stock No. 2002. Juan forthwith
transferred for valuable consideration the new
certificate to Jose who knew nothing of the 10. Is the SEC the venue for actions involving
previous sale to Pedro. In time, the corporation intra-corporate controversies?
was confronted with the conflicting claims of
Pedro and Jose. The Board of Directors of X
Corporation invited you to enlighten them on Answer:
these questions; viz:
Page | 283

a) If a suit were to be initiated in order to

resolve the controversy between Pedro and No. Actions involving intra-corporate
Jose, should the matter be submitted to SEC or controversies are cognizable by the RTC,
to the regular courts? b) Between Pedro and designated by the Supreme Court under SC
Jose, whom should the corporation so recognize Adm. Memo No. 00-11-03, which has
as the rightful stockholder? jurisdiction over the principal office of the
corporation, partnership or association
concerned. (BAR 2006)
How would you respond to the above queries?

11. Atlantis Realty Corporation (ARC), a local

Answer: a) The matter should be submitted to firm engaged in real estate development, plans
the regular court. The controversy between to sell one of its prime assets—a 3-hectare land
Pedro and Jose is not an intra-corporate valued at about P100 M. for this purpose, the
board of directors of ARC unanimously passed a dues and assessments amounting to P195,000.
resolution approving the sale of the property DC disputed the claim, saying that he paid all
for P75 M to Shangrila Real Estate Ventures dues as shown by the fact that he was
(SREV), a rival realty firm. The resolution also previously elected as Director and President of
called for a special stockholders meeting at Medici. Medici, on the other hand, claimed that
which the proposed sale would be up for DC’s obligation was a Construction Corporation.
ratification. Consequently, DC was prevented from
exercising his right to vote and be voted for
during the 2011 election of Medici’s Board of
Atty. Edric, a stockholder who owns only 1 Directors. This prompted DC to file a complaint
share in ARC, wants to stop the sale. He then for damages before the Special Commercial
commences a derivative suit for and in behalf of Court of Pasig City. Medici filed a motion to
the corporation from approving the sale. dismiss on the ground that the court has no
jurisdiction over the intracorporate dispute
which the HLURB has exclusive jurisdiction over.
c) If such a suit is commenced, would it Is Medici correct?
constitute an intra-corporate dispute? If so, why
and where would such a suit be filed? If not,
why not? Answer: No. Medici is not correct. A
controversy between the condominium
corporation and its members-unit owners for
Answer: Yes, such suit would constitute an alleged unpaid association dues and
intra-corporate dispute as it is a suit initiated by assessments and the prevention of DC from
a stockholder against other stockholders who exercising his right to vote and be voted for
are officers and directors of the same during the 2011 election of the Medici’s Board
corporation. Such suit should be filed in the RTC of Directors, partakes of the nature of an
designated by the Supreme Court as a intracorporate dispute which does not fall
corporate or commercial court. within the jurisdiction of the HLURB despite its
expansive jurisdiction. It is considered as an
intra-corporate controversy falling within the
d) Will the suit prosper? Why or why not? jurisdiction of the Regional Trial Court
designated as special commercial court. (BAR
2014)
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. (BAR
2009)

12. DC is a unit owner of Medici Condominium

located in Pasig City. On September 7, 2011,
Medici Condominium Corp. (Medici) demanded
from DC payment for alleged unpaid association