Final Exam in Corporation Law under Atty. Ruben C.

Ladia

Multiple Choice

1. A stockholder whose shares are declared delinquent will have

a. No voting and dividend rights.

b. No voting rights at any meeting.
c. Voting and dividend rights.
d. Voting rights but no dividend rights.

b. Section 71. Effect of delinquency. – No delinquent stock shall be voted for or be entitled to vote or to representation at any
stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in
accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest,
and the costs and expenses of advertisement, if any. (50a)

2. Which of the following meetings is not valid?

a. Members’ meeting held in Tagaytay City where the principal office is located in
Makati but the by-laws that meetings of the members may be held anywhere in the
Philippines.
b. Stockholders’ meeting held in Tagaytay City where the principal office is located
in Makati but the by-laws provide that stockholders’ meetings may be held
anywhere in the Philippines.
c. Trustees’ meeting held in Baguio City where the principal office is located in Makati.
d. Directors’ meeting held in Macau where the principal office is located in Makati.

b. Section 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s meetings, whether regular or
special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or
municipality.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority
of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of
the corporation are present or duly represented at the meeting. (24 and 25)

3. A fraudulent transaction in the trading of securities that involves no change in the

beneficial ownership of the shares is called

a. Matched order.
b. Squeezing the float.
c. Painting the tape.
d. Wash sale.*

4. The fair market value of the shares of a stockholder exercising his appraisal right should
be determined on the date

a. Of the meeting where he interposed his objection.

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b. Of receipt of his written demand that he be paid the value of his shares.
c. Prior to the meeting where the matter was taken up.
d. Of the payment of his shares.

c. Section 82. How right is exercised. – The appraisal right may be exercised by any stockholder who shall have voted against the
proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote
was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be
deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the
day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate
action.

If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing
stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by
the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n)

5. A close corporation may validly provide in its articles of incorporation or by laws that

a. That cumulative voting shall be denied to the SH- Sec. 89, matter of right Stock corp.
b. Proxy voting shall be denied to the SH – sec. 89, GR: may be denied in NS
c. Quorum and voting requirements in SH meeting shall be more than that
required by law.
d. Meetings of SH may be held anywhere in the philipines – sec. 51

c. Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide:

1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their
transfers as may be stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a
particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this
Code.

The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:

1. No meeting of stockholders need be called to elect directors;

2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for
the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.

The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be
elected or appointed by the stockholders, instead of by the board of directors.

True or False

1. In cases of merger, the employees of the absorbent/dissolved incorporation are

automatically absorbed by the absorbing/surviving incorporation.

True – social justice (BPI vs. BPI employees union)

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2. A corporation sole may validly sell/transfer its old van for purposes of acquiring a
new one without court intervention.

True – only real property needs court intervention (Sec. 113)

3. A stockholder issued no par value shares below their determined issued value as
indicated in the Articles of Incorporation is solidarily liable with the responsible
directors/officers for the water in the stocks.

False – sec. 6 provides that No Par Value Shares once issued, are deemed fully paid
and thus, non-assessable. Hence, when issued, only the directors or officers who
consented to the same or even if not, failed to file a written objection with the
corporate secretary shall be solidarily liable and not the stockholder.

4. Pending the issuance of the replacement certificate, the owner of a lost certificate of
stock may validity transfer his shares by a mere notarized deed.

False – Once the certificate of stock has already been issued, it cannot be
transferred by mere notarized deed. Delivery and endorsement are required,
subject to rule of estoppel.

5. A transferee of a certificate of stock in a non-stock corporation, if they are

transferable by virtue of a by-law provision, has the same right, power and authority
to compel the corporation to register the said transfer in the corporate books in his
name, In order that he may be considered as a shareholder, in the same manner that
the transferee of a certificate of stock in a stock corporation may do so.

True.

6. Absent any rules and regulations of the SEC regarding short sale any person engaging
thereto may be subjected to the penal sanctions of section 73 of the Securities
Regulation Code.

True.

7. Absent any by-law provision authorizing the holding of meetings of members in a

non-stock corporation, members’ meetings may nonetheless be validly held anywhere
in the Philippines.

False – There must be a by-law provision as provided in section 93, otherwise,

Section 51 of the Corporation Code will apply which requires the meeting must be
within the city or municipality where the principal office of the corporation is
located.

8. The appointment of a distributor/representative in the Philippines made by a foreign

corporation necessarily results to doing/transacting business in the country.
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False – It does not necessarily amount to doing business in the Philippines if the
distributor/representative has an independent business activity/status. (Lacoste vs
Fernandez)

9. The winning bidder in a delinquency sale is the highest bidder.

False – The winning bidder is the one who shall offer to pay the full amount of the
balance on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a share
pursuant to Section 68.

10. The beneficial owner of a voting trust agreement may validly transfer his shares by a
mere notarized deed.

False –The trustee or trustees shall execute and deliver to the transferors voting
trust certificates which shall be transferable in the same manner and with the same
effect as certificates of stock, pursuant to Section 59, hence by delivery and
endorsement.

Objectives
1. Four instances where the stockholder may be able to exercise his appraisal rights:

a) In case of amendment to the AOI that has the effect of changing or

restricting the rights of any stockholder or class of shares; authorizing
preferences in any respect superior to those outstanding shares of any class;
or in case of amendment to the AOI extending or shortening the term of
corporate existence
b) In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in this Code;
c) In case of merger or consolidation (Section 81);
d) Investing of corporate funds in another corporation or business or for any
purpose other than the primary purpose for which it is organized (Section
42)
e) In a close corporation, a SH has the unbridled right to compel the
corporation for any reason, to purchase his shares at FMV which shall not be
less than the par or issued value, when the corporation has sufficient assets to
cover its debts and liabilities. (Section 105)

2. The twin requirement in order that the Special Commercial Court may be justified in
appointing a management committee, board or body in a corporation:

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a) The corporate assets or properties is in danger of being wasted or destroyed,

that the business of the corporation is being diverted from the purpose from
which it is organized; and
b) Serious paralysation of its operations (Page 672, SyChimvsSySiyHo and
Hons, Inc.)

3. All of the following statements are correct, Why is it said that:

a) If not denied by a provision in the articles of incorporation, the pre-emptive right of a

stockholder in a close corporation is absolute. – The pre-emptive right of a
stockholder in a close corporation shall extend to all stocks to be issued,
including the re-issuance of treasury shares, whether for money, property or
personal services or in payment of corporate debts (Section 102). It is broadened
to include all issues without exceptions.

b) The ruling of the High Court in EB Villarosavs Benito that service of summons upon
a corporation must be made to a person named in the statute, i.e, president, general
manager, treasurer, corporate secretary of in-house counsel, does not apply if the
action brought against the corporation is an intra-corporate controversy. – Intra-
corporate controversy is governed by different rules, Interim Rules of Procedure
on Intra-Corporate Controversies, which provides that in case of intra-corporate
controversy, summons may be served on any statutory or by-law officers.

c) Wash sale and matched order are not illegal per se. – It is illegal if it means to create
false or misleading appearance of active trading in the security concerned.

d) The three year period of liquidation will not apply if a trustee/ assignee/receiver is
appointed to undertake the same. – The trustee/assignee/receiver appointed
becomes the legal owner of the rights, assets and properties conveyed to him, he
can therefore continue prosecuting suits even beyond the 3 year period fixed by
law. (Board of Liquidators vs Kalaw)

e) Certificates of stock are merely quasi-negotiable but non-negotiable. – While the

certificate of stocks may be transferred by endorsement coupled with delivery
and therefore merely quasi negotiable, it is generally viewed as non-negotiable
because the holder thereof takes it without prejudice to such rights and defenses
as the registered owner/s or transferor’s creditor may have under the law.
Subject to the principle of estoppel.

4. What are the three qualifying conditions required to be indicated in the articles of
incorporation in order that the corporation may be considered a close one:

1. That all of the issued shares of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons, not exceeding 20;
2. All issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and

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3. The corporation shall not list in any stock exchange or make any public offering
of any of its stock or any class (Section 96)

Case Analysis

1. x Co., Inc., engaged in the manufacturing concern. It leased a parcel of land where it
erected its plant warehouse and offices. It has an authorized capital stock of ph100M
divided into 100M shares with a par value of Ph1.00 per share, Ph50M has been
subscribed. One of the stockholders thereof is “A” who subscribed to Ph5M and has paid
Ph2.5M out of his subscription.

a) May “A” be issued a stock certificate covering 2.5M shares? Why or why not?

Answer: No. The contract of subscription is indivisible. (Section 64) – No certificate of

stock shall be issued to a subscriber until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if any is due, has been paid. (37)

b) May the corporation bid? Why or why not? (may kulang)

Answer: No. The corporation may bid in the public auction of delinquent shares
subject to the provisions of this code. The power of the corporation to acquire its
own shares is subject to the requirement that there must be unrestricted retained
earnings to cover the shares to be purchased. Here, since the corporation is
incurring losses, it can be assumed that it has no URE and not therefore cannot bid.

Assume that the corporation has been incurring losses to the tune of Ph5M and to raise
much needed funds to pay its liabilities, the Board of Directors decided to make a call for
the unpaid portion of the subscriptions of its stockholders including “A” who did not pay
the same on the date specified in the call, The corporation thus decided to sell his shares
at public auction but no bidders appeared.

c) Is “Y” qualified to vote and be voted or as a director? Why or why not?

Answer: Yes. A subscriber of shares is entitled to all the rights of, and subject to all
the obligations of, shareholder. Hence, he is already qualified to vote and be voted as
a director, provided he is not delinquent, since what is required is that he owns at
least one share. The stipulation in this case is void.

d) Assume that on June 10, 2016, the entire comound of the corporation was ravaged by
fire, turning everything into ashes. May “Y” be compelled to pay the balance of his
acquisition cost? Why or why not?

Answer: Yes. As a subscriber, he is subject to all the rights and obligations of a

stockholder. Hence, he is liable to pay the balance of his subscription. Furthermore,
pursuant to the Trust Fund Doctrine, the creditors of the corporation may look
upon the unpaid subscriptions as source of funds for the settlement of the credits
due to them.
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e) Assume further that the by-laws of the corporation provides for the election of an
Assistant Finance Manager to be elected by the board. Pursuant thereto, the board elected
“Z” as such. He is not a stockholder of the corporation. Later, however, he was
removed/ousted as such Assistant Finance Manager. He files a case before the Special
Commercial Court questioning the validity of his removal therefrom. The corporation
moves for the dismissal of the case in that it is the NLRC that is possessed with
jurisdiction and further arguing that there is no intra-corporate relationship between the
parties. Rule and explain.

Answer: The jurisdiction of the Special Commercial Court to hear intra-corporate

controversy requires that there must be an intra-corporate relationship, that the
controversy is between and among stockholders, members or associates, between
any or all of them and the corporation, partnership or association of which they are
stockholders, members, or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concern their individual
franchise or right to exit as such entity. Here, Z is not a stockholder, therefore, there
is no intra-corporate relationship. The issue is purely a labor case, cognizable by
NLRC, not the Special Commercial Court.

f) Disregarding letter d, and assume that 3 of the 5-man member board reconstituted the
Articles of Incorporation falsely adding new purposes not originally included thereat such
as lumber concession, cattle ranch, mining and agriculture, thereby misapplying and
misusing corporate funds and assets. May a stockholder file a dissolution proceedings
against the corporation? Why or why not?

Answer: No. The dissolution of the corporation is a harsh remedy akin to corporate
punishment. Dissolution will not be granted if there is other remedy or if the rights
of the stockholders may be or are protected by some other remedy. The complained
acts will merely be enjoined.

g) If a case is instituted and you were the judge will you grant the prayer for dissolution?
Why or why not?

Answer: No. I will merely enjoin the complained acts. There are other remedies
available such holding the accountable officers personally liable.

h) Will your answer be the same if the corporation is a close one? Why or why not?

Answer: No. A petition for dissolution of a close corporation may be filed by any
individual stockholder for any act of the directors, officers or any persons having
control of the corporation which is fraudulent, illegal, dishonest, oppressive or
unfairly prejudicial to the corporation or to any stockholder, or whenever corporate
assets are being misapplied or wasted (Section 105). Here, there is misapplication of
corporate funds. Hence, dissolution of the corporation may be granted.

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i) Assume that the corporation is engaged in the discovery of natural gas and its shares are
being traded in the stock exchange. It was able to discover natural gas of commercial
quantity. The Board, instead of disclosing the matter immediately to the SEC and the
Philippine Stock Exchange, called their respective brokers for the acquisition of shares of
the corporation before proceeding to a printer for the publication of the discovery. The
printer, however, before doing his job, also called his broker to acquire shares of the
corporation. What violation of the provisions of the Securities Regulation Code is
committed by
a) The directors?

Answer: The directors of the corporation violated the provision of the SRC with
respect to Insider Trading, or buying or selling security of the issuer while in the
possession of material information with respect thereto that is not generally
available to the public and which will likely affect the market price of the security
after being disseminated to the public and the lapse of a reasonable time for the
market to absorb the information. Here, since the information as to the discovery of
the natural gas is material non-public information, the act of the directors in buying
the shares of the corporation constitutes insider trading.

b) Did the printer commit the same violation? Why or why not?

Answer: Yes, the printer also committer Insider Trading. The definition of
“Insider” pursuant to The Securities Regulation Code included a person whose
relationship or former relationship to the issuer givers or gave him access to
material information about the issue or the security that is not generally available to
the public. The printer is therefore considered as an “Insider”, therefore, committed
“Insider Trading” when he acquired the shares of the corporation prior to making
public the information.

2. Give your comment on the decision of the High Court in Clemente vs Court of Appeals
regarding a juridical entity, long dissolved (40 years) that did not undertake liquidation
and winding to the effect that:

“The termination of the life of a juridical entity does not by itself cause the
extinction or diminution of rights and liabilities of such entity (citing Gonzales vs Sugar
Regulatory Administration) nor those of its owners and directors. If the three year period
extended life has expired without a trustee or receiver having been expressly designated
by the corporation within that period, the board of directors or trustees itself, following
the rationale of the Supreme Court’s decision in Gelano vs. C.A. may be permitted to so
continue as “trustee” by legal implication to complete the liquidation. Since in the
absence of a board of directors or trustees, those having any pecuniary interest in the
assets, including not only the stockholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representations with the (proper forum),
which has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concern.”

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Answer: After the lapse of the three (3) year period, the corporation ceased to exist
for all intent and purposes, even for the purposes of the liquidation and winding up
of its affairs of the corporation. Hence, having no corporate existence, the
corporation can no longer have any successor. The cases of Gonzales vs Sugar
Regulatory Administrationand the Gelanovs CA were misapplied in the case of
Clemente vs CA since in Gonzales vs Sugar Regulatory Administration, the Sugar
Regulatory Administration was created as the successor the Philsucom and was
expressly authorized to take over the assests of the latter. In Gelanovs CA, there was
a lawyer litigating the actions of Insular Sawmill and was considered as the
“trustee” of the dissolved corporation. In Clemente vs CA, there was neither a
successor nor a lawyer acting as a “trustee”. The assets of the dissolved corporation
should have been escheated in favour of the city or municipality where the
properties were located.

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