100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS

100 QUESTIONS, ANSWERS IN CORPORATION LAW [4] EXPLAIN THE DOCTRINE OF PIERCING THE VEIL OF
EXAMS CORPORATE ENTITY?

Here are more than 100 questions and answers that As a rule, a corporation has a personality distinct from
your professor in corporation law may ask in your final its stockholders, and is not affected by the personal
or midterm exams. NOTE: This content is under rights, obligations and transactions of the latter. This
construction. PJ asks for your patience regarding general rule also applies between a parent company
misspellings and other possible errors. and subsidiary. However, the veil of corporate fiction
may be pierced when it is used as a shield to further an
[1] WHAT IS A CORPORATION? end subversive of justice, or for purposes that could not
have been intended by law that created it or to defeat
A corporation is an artificial being created by operation public convenience, justify wrong, protect fraud or
of law, having the right of succession and the powers, defend crime or to perpetuate fraud or confuse
attributes and properties expressly authorized by law or legitimate issues or to circumvent the law or perpetuate
incident to its existence. deception or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders.
[2] WHAT ARE A CORPORATION'S ATTRIBUTES?
If referring to the attribute of a corporation based on its [5] WHAT ARE THE OBLIGATIONS OF DIRECTORS AND
definition, they are the following: [a] artificial being; [b] OFFICERS OF A CORPORATION?
created by operation of law; [c] having the right of In general, directors and officers are bound by the trust
succession; and [d] with express, implied and inherent fund doctrine which states that the governing officers of
powers. the corporation hold in trust the funds of the
If referring to the characteristics of corporations in corporation in trust for the benefit of the stockholders.
general, they are the following: Hence, specifically, directors and officers have the
obligation to maintain loyalty, obedience and diligence
[a] Continuity of existence; to the corporation.
[b] Limited investor or shareholder's liability; According to the Corporation Code, directors and
[c] Separate juridical personality; trustees shall be jointly and severally liable for all
damages suffered by the corporation, shareholders or
[d] Capacity to sue and be sued;
third persons as a result of gross negligence or bad faith
[e] Capacity to incur obligations and acquire rights; in directing the affairs of the corporation or as a result
[f] Centralized management via the governing board; of personal or pecuniary conflict of interest with their
duties as directors or trusties.
[g] Immunity from collateral attack; and
If a director, trustee or officer attempts to acquire or
[h] others. acquires any interest adverse to the corporation's
interest, in violation of his duty or when equity
[3] WHAT IS THE GRANDFATHER RULE? disallows him to deal with himself, he shall be liable as
The Grandfather Rule is a stricter or more stringent test trustee for the corporation and must account for the
than the control test when it comes to determining profits which otherwise would have accrued to the
compliance with the minimum Filipino equity corporation.
requirement among corporations. The Grandfather Rule
determines the actual Filipino ownership and control in [6] WHAT ARE THE CIRCUMSTANCES THAT MAY BE
a corporation by tracing both the direct and indirect CONSIDERED TO JUSTIFY THE APPLICATION OF THE
shareholdings in the corporation. DOCTRINE TO MAKE THE PARENT CORPORATION
LIABLE FOR THE OBLIGATIONS OF ITS SUBSIDIARY?
In other words, if the shares of stock of the immediate
investor corporation is in turn held and controlled by According to Garrett vs. Southern Railway, there are 11
another corporation, then we must look into the factors:
citizenship of the individual stockholders of the latter [a] STOCK. The parent corporation owns all or most of
corporation. In other words, if there are layers of the capital stock of the subsidiary;
intervening corporations investing in a Filipinized
venture, we must delve into the citizenship of the [b] DIRECTORS. The parent and subsidiary have
individual stockholders of each corporation. common directors and officers;
[c] FINANCE. The parent finances the subsidiary;
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
[d] SUBSCRIPTION OR INCORPORATION. The parent [g] Deception through alter ego, adjunct or business
subscribes to all the capital stock of the subsidiary or conduit.
otherwise causes its incorporation;
8. WHAT ARE THE ELEMENTS THAT MUST BE PRESENT
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has
TO JUSTIFY THE PIERCING OF THE VEIL OF CORPORATE
grossly inadequate capital;
FICTION ON THE GROUND THAT THE CORPORATION IS
[f] EXPENSES AND LOSSES. The parent pays the salaries A MERE ALTER EGO?
and other expenses or losses of the subsidiary;
According to Garrett vs. Southern Railway, there are 11
[g] NO OTHER BUSINESS. The subsidiary has factors:
substantially no business except with the parent
corporation or no assets except those conveyed to or by [a] STOCK. The parent corporation owns all or most of
the parent corporation; the capital stock of the subsidiary;

[h] DEPARTMENT OR DIVISION. In the papers of the [b] DIRECTORS. The parent and subsidiary have
parent corporation or in the statements of its officers, common directors and officers;
the subsidiary is described as a department or division [c] FINANCE. The parent finances the subsidiary;
of the parent corporation or its business or financial
[d] SUBSCRIPTION OR INCORPORATION. The parent
responsibility is referred as the parent’s own;
subscribes to all the capital stock of the subsidiary or
[i] PROPERTY. The parent corporation uses the property otherwise causes its incorporation;
of the subsidiary as its own;
[e] GROSSLY INADEQUATE CAPITAL. The subsidiary has
[j] DEPENDENCE. The directors or the executives of the grossly inadequate capital;
subsidiary do not act independently in the interest of
[f] EXPENSES AND LOSSES. The parent pays the salaries
the subsidiary but take their orders from the parent
and other expenses or losses of the subsidiary;
corporation in the latter’s interest; and
[g] NO OTHER BUSINESS. The subsidiary has
[k] LEGAL REQUIREMENTS. The formal legal
substantially no business except with the parent
requirements of the subsidiary are not observed.
corporation or no assets except those conveyed to or by
the parent corporation;
[7] IS OWNERSHIP OF SUBSTANTIAL PORTION OF THE
OUTSTANDING CAPITAL IN A CORPORATION ENOUGH [h] DEPARTMENT OR DIVISION. In the papers of the
JUSTIFICATION TO APPLY THE DOCTRINE? parent corporation or in the statements of its officers,
the subsidiary is described as a department or division
No, ownership of substantial portion of the outstanding
of the parent corporation or its business or financial
capital in a corporation is no enough justification to
responsibility is referred as the parent’s own;
apply the doctrine of piercing of the corporate veil.
[i] PROPERTY. The parent corporation uses the property
The veil of corporate fiction may be pierced when it is
of the subsidiary as its own;
used as a shield to further an end subversive of justice,
or for purposes that could not have been intended by [j] DEPENDENCE. The directors or the executives of the
law that created it or to defeat public convenience, subsidiary do not act independently in the interest of
justify wrong, protect fraud or defend crime or to the subsidiary but take their orders from the parent
perpetuate fraud or confuse legitimate issues or to corporation in the latter’s interest; and
circumvent the law or perpetuate deception or as an [k] LEGAL REQUIREMENTS. The formal legal
alter ego, adjunct or business conduit for the sole requirements of the subsidiary are not observed.
benefit of the stockholders. Therefore, there are limited
circumstances in which said doctrine applies: [9] EXPLAIN THE RIGHT OF SUCCESSION.
[a] Injustice;
In corporation law, right of succession also means
[b] Public inconvenience; "continuity of existence." This means that, despite the
death, incapacity, replacement or civil interdiction of
[c] Wrong;
the persons composing it, the corporation is not
[d] Fraud; affected and its business operations continue
[e] Crime; uninterrupted as long as its juridical personality exists.

[f] Confusion regarding legitimate issues; and (among [10] DISTINGUISH THE FOLLOWING:
others)
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
A. DE JURE CORPORATION VS. DE FACTO CORPORATION First, an invalid law creates no office, confers no rights
and imposes no obligation. It is not a source of anything
A de facto corporation is a defectively organized
because it is void.
corporation, which has all the powers and liabilities of a
de jure corporation and, except as to the State, has a Second, for there to be a de facto corporation, there
juridical personality distinct and separate from its must be an apparently valid statute under which the
shareholders, provided that the following requisites are corporation with its purposes may be formed.
concurrently present:
[12] MAMUHUNAN WAS INVITED BY HIS FRIENDS TO
[a] That there is an apparently valid statute under which
INVEST IN A CORP., A NEWLY ORGANIZED FIRM
the corporation with its purposes may be formed;
ENGAGED IN MONEY MARKET FINANCING OPERATION.
[b] That there has been colorable compliance with the BECAUSE OF HIS HEAVY INVESTMENTS, MAMUHUNAN
legal requirements in good faith; and BECAME THE FIRM’S PRESIDENT AND, AS SUCH,
[c] That there has been use of corporate powers, i.e., PURCHASED A BIG NUMBER OF COMPUTERS,
the transaction of business in some way as if it were a TYPEWRITERS AND OTHER EQUIPMENT FROM TAKTAK
corporation. CORP. ON INSTALLMENT BASIS. A CORP. PAID THE
DOWN PAYMENT AND TAKTAK CORP. ISSUED THE
A corporation which has no defect in legal requirements CORRESPONDING RECEIPT. TO HIS CHAGRIN,
is a de jure corporation. MAMUHUNAN DISCOVERED THAT THE ARTICLES OF
B. STOCK CORPORATION VS. NON-STOCK INCORPORATION HAD NOT BEEN FILED BY HIS FRIENDS
ON THAT DATE SO HE HURRIEDLY ATTENDED TO THE
A stock corporation is one whose capital stock is divided MATTER. NO SOONER HAD THE CERTIFICATE OF
into shares and whose articles of incorporation allows it INCORPORATION BEEN ISSUED BY THE SEC, A CORP.
to distribute dividends. A non-stock corporation is one BECAME BANKRUPT AFTER THREE MONTHS. UPON
which lacks either of the two requirements of a stock BEING SUED BY TAKTAK CORP. IN HIS PERSONAL
corporation. CAPACITY, MAMUHUNAN RAISED AMONG ITS
C. CORPORATION VS. PARTNERSHIP DEFENSES THE DOCTRINES OF DE FACTO
CORPORATIONS AND CORPORATIONS BY ESTOPPEL.
A corporation is different from a partnership in the
CAN THE TWO DEFENSES BE VALIDLY RAISED?
following ways:
As to the defense of de facto corporation, no, it cannot
[a] A corporation is created by law or by operation of
be validly raised because one requisite is that there
law while a partnership is created by mere agreement
must be a colorable compliance with the legal
of the parties;
requirement. In short, there must be a certificate of
[b] A corporation is governed primarily by the registration issued by the proper government agency
Corporation Code while a partnership, the Civil Code; which, in this case, is the Securities and Exchange
[c] A corporation can only exercise powers which are Commission.
expressly granted by law or those inherent or implied If used to implead his friends, the defense of
while a partnership can act freely as long as not corporation by estoppel can be validly raised.
contrary to law, morals, good customs, public order and
Under the Corporation Code, the doctrine of
public policy; and
corporation by estoppel is a device to protect persons
[d] A corporation acts through a board while a dealing with an ostensible corporation. "All persons
partnership acts through any partner, except when a who assume to act as a corporation knowing it to be
general partner has been appointed. without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred
[11] A CORPORATION WAS CREATED BY A SPECIAL or arising as a result thereof."
LAW. LATER, THE LAW CREATING IT WAS DECLARED
Therefore, in the case of Mamuhunan, he can use this
INVALID. MAY SUCH CORPORATION CLAIM TO BE A DE
doctrine to bring to the suit and make liable his friends
FACTO CORPORATION?
who invited him to invest and made him believe that
No, such a corporation created by an invalid special law the corporation exists.
cannot claim to be a de facto corporation for two
However, if Mamuhunan intends to use this defense to
reasons.
defeat the valid claims of TAKTAK, it cannot be validly
raised. According to the Corporation Code, when any
such ostensible corporation is sued on any transaction
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
entered by it as a corporation or on any tort committed [15] WHAT ARE THE FULLY OR PARTLY NATIONALIZED
by it as such, it shall not be allowed to use as a defense CORPORATIONS?
its lack of corporate personality. On who assumes an
obligation to an ostensible corporation as such, cannot Based on the Constitution and statutes such as the Anti-
resist performance thereof on the ground that there Dummy Law, the following are nationalized
was in fact no corporation. corporations:
[a] Banking institutions;
[13] EXPLAIN WHO THE FOLLOWING ARE:
[b] Finance institutions;
A. INCORPORATORS
[c] Public utilities;
Incorporators are those stockholders or members
[d] Those engaged in the disposition, development and
mentioned in the articles of incorporation as originally
utilization of natural resources;
forming and composing the corporation and who are
signatories thereof. [e] Fishing companies;
B. CORPORATORS [f] Shipping companies;
Corporators are those who compose a corporation, [g] Construction companies;
whether as stockholders or as members. [h] Those dealing with geothermal energy;
C. STOCKHOLDERS AND MEMBERS [i] Retail companies;
Broadly, a stockholder or member is a person who has [j] Mass media;
interest in a corporation by reason of his investment
therein. A stockholder is an investor in a stock [k] Advertising;
corporation while a member is an investor in a non- [l] Educational institutions;
stock corporation.
[m] Those engaged in the rice and corn industries;
D. DIRECTORS AND TRUSTEES
[n] Those engaged in the tax-free cottage industry; and
Directors and trustees are persons who compose the
governing board of a corporation. Directors are [o] Those dealing with atomic energy.
members of the governing board of a stock corporation
while trustees, non-stock corporation. [16] WHAT INDUSTRIES ARE NOT ALLOWED TO HAVE
FOREIGN STOCKHOLDERS?
E. CORPORATE OFFICERS
As discussed above, under the Constitution and
Corporate officers are special agents of the corporation statutes, there are nationalized industries. Partly
as provided in its by-laws. According to the Corporation nationalized ones can have foreign stockholders as long
Code, there shall be an election of corporate officers as the minimum Filipino equity requirement is complied
such as the president, who shall be a director, a with. In case of fully nationalized industries,
treasurer who may or may not be a director, a secretary corporations engaged therein are not allowed to have
who shall be a resident and citizen of the Philippines, any foreign stockholder.
and such other officers as may be provided for in the
by-laws. Examples of fully nationalized/Filipinized industries are:
[a] rural banks; [b] cooperative fish farming; [c] use of
F. PROMOTER marine resources; [d] retail trade; [e] mass media; and
A promoter is a person who invites investors and [f] rice and cord industry.
subscribers before the formation and organization of a
corporation. Contracts entered into by a promoter are [17] WHAT CORPORATE NAME CANNOT BE USED?
called pre-incorporation subscriptions.
No corporate name may be allowed by the SEC if the
proposed name is identical or deceptively or confusingly
[14] CAN ALL THE STOCKHOLDERS IN A CORPORATION
similar to that of any existing corporation or to any
BE FOREIGNERS?
other name already protected by law or is patently
Yes, as long as the corporation is not engaged in a deceptive, confusing or contrary to existing laws. When
nationalized business, all its stockholders can be a change in the corporate name is approved, the
foreigners. Commission shall issue an amended certificate of
incorporation under the amended name. In short, the
following are not allowed:
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
[a] Identical names; Capital is the maximum fund that the corporation
intends to use in its operations. If reflected on the
[b] Deceptively similar names;
articles of incorporation and approved by the SEC, it is
[c] Confusingly similar names; called "authorized capital stock."
[d] Names protected by law;
[21] THE ARTICLES OF INCORPORATION TO BE
[e] Patently deceptive names; REGISTERED IN THE SEC CONTAINED THE FOLLOWING
[f] Confusing names; and PROVISIONS

[g] Illegal names. A) “FIRST ARTICLE. THE NAME OF THE CORPORATION

SHALL BE TOHO MARKETING COMPANY.” B) “THIRD
18. WHAT IS THE IMPORTANCE/SIGNIFICANCE OF THE ARTICLE. THE PRINCIPAL OFFICE OF THE CORPORATION
PRINCIPAL PLACE OF BUSINESS STATED IN THE SHALL BE LOCATED IN REGION III, IN SUCH
ARTICLES OF INCORPORATION? MUNICIPALITY THEREIN AS ITS BOARD OF DIRECTORS
MAY DESIGNATE.” C) “SEVENTH ARTICLE. THE CAPITAL
The statement regarding an exact principal place of STOCK OF THE CORPORATION IS ONE MILLION PESOS
business in the AOI is important because it is this (P1,000,000.00), PHILIPPINE CURRENCY.”
address to which all summons, papers and other legal
processes can be sent. WHAT ARE YOUR COMMENTS AND SUGGESTED
CHANGES TO THE PROPOSED ARTICLES?
19. WHAT IS THE MAXIMUM TERM OF A First, the corporate name already exists. It should be
CORPORATION? CAN IT BE EXTENDED? changed.
Under the Revised Corporation Code, the maximum Second, the principal place of business or principal
term of corporate existence has been removed. The office should be more specific. According to the
Philippines now adopts the doctrine of perpetual implementing rules and regulations of the SEC, the
corporate existence. principal office should be an exact address.

20. DETERMINE THE FOLLOWING TERMS: [22] HOW CAN THE ARTICLES OF INCORPORATION BE
AMENDED?
A. AUTHORIZED CAPITAL STOCK
There must be [a] a resolution by the governing board
This is the maximum capital of the corporation as
via a majority vote of its members; [b] 2/3 vote or
reflected on its articles of incorporation as approved by
written assent of the stockholders representing the
the SEC.
outstanding capital stock; [c] submission to and filing
B. SUBSCRIBED CAPITAL STOCK with the SEC; [d] a copy of the amendments duly
certified under oath by the corporate secretary and a
This is part of the authorized capital or the whole of it
majority of the directors or trustees stating that the
over which there have been contracts of subscription. In
vote requirements have been complied with; and [e]
other words, there has been a promise to pay and
favorable recommendation by the appropriate
purchase said stocks and, as a result of such contract, a
supervising government agency.
stockholder holds the stocks. According to the
Corporation Code, at least 25% of the capital stock must
[23] WHEN CAN SEC SUSPEND OR CANCEL CERTIFICATE
be subscribed.
OF REGISTRATION?
C. PAID-UP CAPITAL
Without prejudice to other grounds provided by special
This is part of the authorized capital stock or the whole laws, the license of a foreign corporation to transact
of it which has not only been subscribed but also paid. business in the Philippines may be revoked or
According to the Corporation Code, the paid-up capital suspended by the Securities and Exchange Commission
must be at least 25% of the subscribed capital. upon any of the following grounds:
D. OUTSTANDING CAPITAL [a] REPORT. Failure to file its annual report or pay any
fees as required by this Code;
Outstanding capital is that part of the authorized capital
which has been issued as shares to stockholders. [b] RESIDENT AGENT. Failure to appoint and maintain a
resident agent in the Philippines as required by this
E. CAPITAL.
Title;

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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
[c] CHANGES. Failure, after change of its resident agent It must be noted, however, that by-laws are mere
or of his address, to submit to the Securities and internal rules and are subordinate to the articles of
Exchange Commission a statement of such change as incorporation.
required by this Title;
[26] WHAT ARE THE KINDS OF POWERS OF A
[d] AUTHENTICATION. Failure to submit to the
CORPORATION?
Securities and Exchange Commission an authenticated
copy of any amendment to its articles of incorporation In the broad sense, a corporation has the following
or by-laws or of any articles of merger or consolidation powers:
within the time prescribed by this Title;
[a] Those expressly granted or authorized by law and its
[e] MISREPRESENTATION. A misrepresentation of any charter or articles of incorporation;
material matter in any application, report, affidavit or
[b] Those impliedly granted or authorized by law as are
other document submitted by such corporation
reasonable necessary to carry out its express powers;
pursuant to this Title;
and
[f] FAILURE TO PAY TAXES. Failure to pay any and all
[c] Those incidental to its existence.
taxes, imposts, assessments or penalties, if any, lawfully
due to the Philippine Government or any of its agencies In the narrow sense, a corporation has the following
or political subdivisions; express powers (those expressly granted by law):
[g] OUTSIDE PURPOSE. Transacting business in the [a] Power to extend or shorten its corporate term;
Philippines outside of the purpose or purposes for
[b] Power to increase or decrease its capital stock;
which such corporation is authorized under its license;
[c] Power to incur, create or increase bonded
[h] UNLICENSED FOREIGN CORPORATION. Transacting
indebtedness;
business in the Philippines as agent of or acting for and
in behalf of any foreign corporation or entity not duly [d] Power to deny pre-emptive rights;
licensed to do business in the Philippines; or [e] Power to sell or dispose of corporate assets;
[i] OTHER GROUNDS. Any other ground as would [f] Power to acquire own shares;
render it unfit to transact business in the Philippines. (n)
[g] Power to invest corporate funds in another
[24] WHAT IS A BY-LAW AND IT’S VALID REQUISITES? corporation or business or for any other purpose;

A by-laws is the internal rules of the corporation. It is [h] Power to declare dividends; and
the list of policies for the corporation's internal [i] Power to enter into management contracts.
business. The requisites for its validity are:
[a] It must not be contrary to law, public policy or [27] WHAT IS AN ULTRA VIRES ACT?
morals; An ultra vires act is one done by the corporation outside
[b] It must not be inconsistent with the articles of of its purpose. In other words, it is an act not supported
incorporation; by the purpose clause in the articles of corporation.

[c] It must be general and uniform in its effect or 28. WHO MAY EXERCISE THE POWERS OF THE
applicable to all alike or those similarly situated; CORPORATION?
[d] It must not impair the obligations of contracts or
The powers of a corporation are exercised by the
vested rights; and
governing board.
[c] It must be reasonable.
In case of stock corporations, it is the board of directors.
In non-stock corporations, it is the board of trustees.
[25] WHAT IS THE BINDING EFFECT OF THE
PROVISIONS OF THE BY-LAWS? [29] IAI INC. (IAI) BY A STOCK PURCHASE AGREEMENT
SOLD TO AI INC (AI) FOR THE SUM OF P19.5M ALL ITS
By-laws become effective and binding only upon OUTSTANDING SHARES OF STOCKS IN “F” CORP. THE
approval of the Securities and Exchange Commission AGREEMENT WAS SIGNED BY LG AND JV, PRESIDENTS
(SEC). Also, all the elements for its validity must be OF IAI AND AI RESPECTIVELY. IAI EXPRESSLY
present; otherwise, it cannot bind anyone. WARRANTED IN THE AGREEMENT THAT THE
NETWORTH OF “F” CORP. IS P12M. IAI AGREED THAT IF
THE NETWORTH IS LESS THAN P12M, IAI WILL PAY AI
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
THE DEFICIENCY. AI PAID IAI P12M AND RETAINED THE A stock corporation shall have the power to purchase or
AMOUNT OF P7.5M TO ANSWER FOR ANY DEFICIENCY acquire its own shares for a legitimate corporate
IN THE NET WORTH. INSTEAD OF REFLECTING A NET purpose or purposes, including but not limited to the
WORTH, IT TURNED OUT THAT “F” HAD A DEFICIENCY following cases: Provided, That the corporation has
OF P1.2M. HENCE, IAI IS OBLIGATED TO REIMBURSE AI unrestricted retained earnings in its books to cover the
THE AMOUNT OF P13.2M (P12M PLUS THE DEFICIENCY shares to be purchased or acquired:
OF P1.2M). HOWEVER, CONSIDERING THAT AI
[a] To eliminate fractional shares arising out of stock
RETAINED P7.5M, THE BALANCE TO BE REIMBURSED IS
dividends;
ONLY P5.2M. LATER, LG, THE PRESIDENT OF IAI
PROPOSED IN WRITING THAT AI’S CLAIM FOR REFUND [b] To collect or compromise an indebtedness to the
BE REDUCED TO P4.09M BUT HE PROMISED TO PAY THE corporation, arising out of unpaid subscription, in a
COSTS OF CERTAIN SUPERSTRUCTURES IN BEHALF OF delinquency sale, and to purchase delinquent shares
AI. AI ACCEPTED THE PROPOSAL. LATER IAI’S BOARD sold during said sale; and
REFUSED TO IMPLEMENT THE ACCEPTED PROPOSAL ON [c] To pay dissenting or withdrawing stockholders
THE GROUND THAT WHILE THE BOARD AUTHORIZED LG entitled to payment for their shares under the
TO PURCHASE THE SHARES, IT DID NOT AUTHORIZE LG provisions of the Corporation Code.
TO MAKE THE LAST PROPOSAL. IS THE POSITION OF
IAI’S BOARD TENABLE? [32] CAN THE BOARD BE COMPELLED TO DECLARE
DIVIDENDS EVERY YEAR?
[30] IN WHAT INSTANCES IS CONCURRENCE OF THE
STOCKHOLDERS NECESSARY FOR THE EXERCISE OF THE As a general rule, the declaration of dividends is a
POWERS OF THE CORPORATIONS? business judgment which is lodged in the governing
board. By way of exception, the articles of incorporation
[a]Section 16. Amendment of Articles of Incorporation may provide that such declaration is required every
[b]Section 28. Removal of directors or trustees year.
[c]Ratification under Section 32. Dealings of directors, It may also happen that the corporation's unrestricted
trustees or officers with the corporation retained earnings would exceed 100% of its paid-in
capital stock every year. In such a case, each year this
[d]Ratification under Section 34. Disloyalty of a director
happens, the board may be compelled to so declared
[e]Section 37. Power to extend or shorten corporate except:
term
[a] When justified by definite corporate expansion
[f]Sale of all or substantially all under Section 40. Sale or projects or programs approved by the board of
other disposition of assets directors; or
[g]Section 42. Power to invest corporate funds in [b] When the corporation is prohibited under any loan
another corporation or business or for any other agreement with any financial institution or creditor,
purpose whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet
[h]Merger or acquisition under Section 77.
been secured; or
Stockholder’s or member’s approval
[c] When it can be clearly shown that such retention is
[i]Dissolution of the corporation under Section 118.
necessary under special circumstances obtaining in the
Voluntary dissolution where no creditors are affected
corporation, such as when there is need for special
and Section 119. Voluntary dissolution where creditors
reserve for probable contingencies
are affected
[j]Deletion or removal of any provision in the articles or [33] WHAT IS THE TRUST FUND DOCTRINE?
changes in the quorum or voting requirements among
close corporations under Section 103. Amendment of Trust fund doctrine is a principle of judicial invention
articles of incorporation which says that corporate assets are held as a trust fund
for the benefit of shareholders and creditors and that
[k] Section 43. Power to declare dividends (in case of the corporate officers have a fiduciary duty to deal with
stock dividends) them properly.

[31] WHAT ARE THE INSTANCES WHEN CORPORATION [34] WHAT CAN BE INCLUDED IN UNRESTRICTED
MAY ACQUIRE ITS OWN SHARES? RETAINED EARNING?

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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
In a nutshell, unrestricted retained earnings are surplus [e] The sale of assets must not be illegal such as an
profits which have not yet been earmarked for a project illegal combination or monopoly;
or transaction. More specifically, they are earnings
[f] Any dissenting stockholder shall have the option to
which have not been allocated for any managerial,
exercise his appraisal right.
contractual or legal purpose and which are free for
distribution to stockholders as dividends. [39] X CORPORATION IS ENGAGED IN SELLING PENCILS
ON WHOLESALE BASIS. IT IS MERELY RENTING A
[35] WHAT ITEMS CANNOT BE USED FOR DIVIDEND BODEGA AND 90% OF ITS ASSETS CONSISTS OF ITS
DISTRIBUTION? STOCKS OF PENCIL. “A”, A SCHOOL SUPPLY DEALER,
PURCHASED ALL THE STOCKS OF X CORP. IS THE
Broadly, the following items cannot be used for
TRANSACTION A SALE OF SUBSTANTIALLY ALL OF THE
dividend distribution:
ASSETS OF THE CORPORATION REQUIRING
[a] Earnings allocated for managerial purposes; CONCURRENCE OF STOCKHOLDERS REPRESENTING 2/3
OF THE OUTSTANDING CAPITAL STOCK?
[b] Earnings allocated for contractual purposes; and
[c] Earnings allocated for legal purposes. No, because this sale is in the regular course of
business. Moreover, this is in line with the purpose of
Specifically, the dividends cannot be distributed from the corporation.
the corporation's capital. It should be from actual and
bona fide earnings. Revaluation surplus, reduction [40] AA CORPORATION IS ENGAGED IN THE BUSINESS
surplus and treasury shares also cannot be used as OF PRINTING BOOKS. AROUND 70% OF ITS ASSETS
items for dividend distribution. CONSISTS OF CASH IN THE BANK, 25% PRINTING
MACHINE AND THE REMAINING OFFICE EQUIPMENT
In addition to this, considerations received from the AND SUPPLIES. AA CORPORATION PLANS TO SELL THE
issuance of no-par value shares form part of the capital MACHINE. CAN IT BE CONSIDERED SALE OF
and cannot be distributed as dividends. SUBSTANTIALLY ALL OF THE ASSETS OF THE
CORPORATION?
[36] CAN GAIN FROM SALE OF REAL PROPERTY BE
CONSIDERED PART OF UNRESTRICTED RETAINED Yes, because the normal operations of the company
EARNINGS? would be impaired by such sale. Sale of substantially all
assets of the corporation has been defined as that
Yes. which will render it "incapable of continuing the
business or accomplishing the purpose for which it is
[37] CAN TREASURY SHARES BE DISTRIBUTED BY WAY incorporated. The test is not quantity but quality.
OF DIVIDENDS?
Yes. [41] WHAT ARE THE WAYS OF INCREASING AND
DECREASING THE CAPITAL STOCK?
[38] WHAT ARE THE REQUISITES OF A SALE OF ALL OR The following are three ways of doing this:
SUBSTANTIALLY ALL PROPERTIES?
[a] Increasing the par value of existing shares without
The following requisites of a sale of all or substantially increasing the number of shares;
all properties:
[b] Increasing the number of existing shares without
[a] Resolution by the majority vote of a governing increasing the par value thereof; and
board;
[c] Increasing the number of existing shares and, at the
[b] Authorization from the stockholders representing at same time, increasing the par value thereof.
least 2/3 of the outstanding capital stock or 2/3 of
members; 42. WHAT ARE THE QUALIFICATIONS OF DIRECTORS?
[c] Such ratification of stockholders or members must [a] He must have at least one (1) share which stands in
be made at a meeting duly called for that purpose; his name on the books of the corporation; and
[d] Prior written notice of the proposed action and of [b] He must be a natural person.
the time and place of meeting addressed to all
stockholders of record, either by mail or personal Also:
service; [c] He must not have been convicted by final judgment
for a crime punishable by at least 6 years of
imprisonment;
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
[d] He must not have violated the Corporation Code 47. ANSWER THE FOLLOWING:
within 5 years prior to the date of his election; and
A. WHO ARE SELF-DEALING
[e] He must be of legal age. DIRECTORS/TRUSTEES/OFFICERS?

43. WHAT IS THE BUSINESS JUDGEMENT RULE? Self-dealing corporate agents are those [a] who have
pecuniary interest in the a transaction or contract that
Courts will not interfere with the decisions made by the the corporation is entering into and [b] whose
governing board as regards the internal affairs of the affirmative vote is material to the realization or
corporation unless such acts are so unconscionable and approval of such transaction, contract or project.
oppressive as to amount to a wanton destruction of the
B. WHAT ARE THE RULES WHEN THERE IS A SELF-
rights of the minority shareholders, let alone illegal.
DEALING DIRECTOR/TRUSTEE/OFFICER IN A
CORPORATION?
44. WHAT IS THE DOCTRINE OF CORPORATE
OPPORTUNITY? A contract of the corporation with one or more of its
directors or trustees is VOIDABLE, at the option of such
Where a director, by virtue of his office, acquires for
corporation.
himself a business opportunity which should belong to
the corporation, thereby obtaining profits to the Such contract is VALID if all of the following conditions
prejudice of such corporation: A director shall refund to are present:
the corporation all the profits he realizes on a business [a] That the presence of such director or trustee in the
opportunity which: [a] the corporation is financially able board meeting in which the contract was approved was
to undertake; [b] from its nature, is in line with not necessary to constitute a quorum for such meeting;
corporation's business and is of practical advantage to
it; and [ c] the corporation has an interest or a [b] That the vote of such director or trustee was not
reasonable expectancy. necessary for the approval of the contract;
[c] That the contract is fair and reasonable under the
45. WHO IS AN INTERLOCKING DIRECTOR? circumstances; and
Interlocking directors are those whose interests in two [d] That in case of an officer, the contract has been
(or more) companies are both (all) substantial. previously authorized by the BOD.
Substantial interest means more than 20% of the
In the absence of the [a] and [b] above, there may be
outstanding capital stock.
ratification by stockholders representing at least 2/3 of
the outstanding capital stock or at least 2/3 of the
46. ARE CORPORATE AGENTS SUCH AS DIRECTORS,
members in a meeting called for the purpose voted to
TRUSTEES OR OFFICERS OF A CORPORATION
ratify the contract after full disclosure of such adverse
SOLIDARILY LIABLE WITH THE CORPORATION THEY
interest in said meeting.
REPRESENT?
Generally, corporate agents are not solidarily liable with 48. WHO ARE THE CORPORATE OFFICERS OF A
the corporation because of the doctrine of separate CORPORATION?
corporate personality.
They are those officers identified by the Corporation
It is hornbook principle that personal liability of Code, by the articles of incorporation or by the by-laws
corporate directors, trustees or officers attaches only of the corporation. Currently, the Revised Corporation
when: [a] they assent to a patently unlawful act of the Code provides that they are the CEO, CFO, the
corporation, or when they are guilty of bad faith or corporate secretary and other officers as may be
gross negligence in directing its affairs, or when there is provided in the by-laws.
a conflict of interest resulting in damages to the
corporation, its stockholders or other persons; [b] they 49. IS SERVICE OF SUMMONS ON A SECRETARY OF THE
consent to the issuance of watered down stocks or PRESIDENT OF A DOMESTIC PRIVATE CORPORATION
when, having knowledge of such issuance, do not BINDING ON THE CORPORATION?
forthwith file with the corporate secretary their written
objection; [c] they agree to hold themselves personally No, because the Rules of Court requires that such
and solidarily liable with the corporation; or [d] they are service shall be made exclusively to the President, the
made by specific provision of law personally answerable Managing Director, the Corporate Secretary, the in-
for their corporate action. house counsel, the Treasurer or the General Manager.

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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS

50. “A”, AS OWNER OF A CERTAIN NUMBER OF SHARES THE OBLIGATION UNDER THE AGREEMENT, THE
OF STOCK IN X CORPORATION, ENTERED INTO A MEMBERS OF THE “T” FAMILY WERE ALLEGEDLY
VOTING TRUST AGREEMENT WITH B. ON THE BASIS OF PREVENTED FROM ACTING AS VICE-PRESIDENT AND
THE VOTING TRUST AGREEMENT, B ANNOUNCED HIS TREASURER), THE “T” FAMILY FILED AN ACTION FOR
DESIRE TO RUN FOR A SEAT IN THE BOARD OF RESCISSION OF THE PRE-SUBSCRIPTION AGREEMENT
DIRECTORS OF X CORPORATION. C, ANOTHER AND ASKED FOR THE LIQUIDATION OF THE ASSETS OF
STOCKHOLDER, OBJECTED AND QUESTIONED THE FLADC. WILL THE ACTION PROSPER? EXPLAIN.
ELIGIBILITY OF B TO BE A DIRECTOR OF X
No, because the agreement is contrary to the
CORPORATION. IS C’S CONTENTION CORRECT? WHY?
Corporation Code.
A voting trust agreement results in the separation of the
[a] Amendments increasing and decreasing the capital
voting rights of a stockholder from his other rights such
stock must not only be approved by the board and the
as the right to receive dividends and other rights to
stockholders, it must also be registered with and
which a stockholder may be entitled until the
approved by the SEC;
liquidation of the corporation. It is the trustee of the
shares who acquires legal title to the shares under the [b] The election of corporate officers is within the
voting trust agreement and thus entitled to the right to power of the governing board and cannot be taken
vote and the right to be elected as board of directors away by mere contract;
while the trustor‐stockholder has the beneficial title [c] The election of directors is within the power of the
which includes the right to receive dividends (Lee vs. CA stockholders exclusively and cannot be taken away by
205 SCRA 752) mere contract; and

51. WHO CAN APPOINT AND REMOVE THE OFFICERS [d] The management of the affairs of the corporation is
OF THE CORPORATION? a business judgment which cannot be taken away from
the board of directors.
The stockholders have the power to remove directors of
the corporation. The power to remove belongs to the 53. HOW DOES ONE BECOME A SHAREHOLDER IN A
stockholders exclusively. The appointment of CORPORATION?
directors/trustees is done by election also by the
stockholders/members. He becomes one by subscription (contract of unissued
shares), by purchase of shares from existing
After the election of directors, they (the directors) must stockholders or purchase of treasury shares from the
formally organize for the election of corporate officers. corporation.
52. FLAD CORPORATION WAS ORIGINALLY WITH AN
AUTHORIZED CAPITAL STOCK OF P500,000.00 SHARES 54. WHAT IS AN UNDERWRITING AGREEMENT?
WITH THE MEMBERS OF THE “T” FAMILY OWNING It is a contract for subscription entered into between a
P450,200.00 SHARES REPRESENTING THE promoter (also known as underwriter) and a would-be
OUTSTANDING CAPITAL. THE “T” FAMILY INVITED stockholder.
MEMBERS OF THE “O” FAMILY TO INVEST IN FLADC AS
STOCKHOLDERS NECESSITATING AN INCREASE OF THE 55. WHAT IS THE DOCTRINE OF INDIVIDUALITY AND
AUTHORIZED CAPITAL STOCK TO GIVE EACH GROUP INDIVISIBILITY OF SUBSCRIPTION?
EQUAL(50-50) SHAREHOLDINGS AS AGREED UPON IN
THE PRE-SUBSCRIPTION AGREEMENT. PURSUANT TO A subscription is one entire and indivisible whole
THE SAID SUBSCRIPTION AGREEMENT, THE contract. It cannot be divided into portions.
AUTHORIZED CAPITAL STOCK WAS THUS INCREASED
FROM P500,000.00 SHARES TO P2,000,000.00 SHARES 56. DISTINGUISH SHARE OF STOCK FROM CERTIFICATE
WITH A PAR VALUE OF P100.00 EACH, WITH THE “O” OF STOCK.
FAMILY SUBSCRIBING TO P1,000,000.00 SHARES AND
A share of stock is an interest in the corporation while a
THE “T” TO P549,800.00 MORE SHARES IN ADDITION TO
certificate of stock is a paper which serves as prima
THEIR P450,200.00 SHARES TO COMPLETE
facie proof of such interest.
P1,000,000.00 SHARES. THE PRE-SUBSCRIPTION
AGREEMENT LIKEWISE PROVIDES THAT THE “T” FAMILY A share of stock is a part of the capital stock of a
SHALL NOMINATE THE VICE-PRESIDENT AND corporation which may be purchased or issued. On the
TREASURER AND FIVE DIRECTORS WHILE THE “O” other hand, a certificate of stock, even if unissued, does
FAMILY IS SUPPOSED TO MANAGE THE MALL OWNED not mean that a stockholder owns no share in the
BY FLADC. LATER, ALLEGING NON-COMPLIANCE WITH corporation.
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
A share of stock is a unit of investment which an [3] Entire consideration received by the corporation
investor promises to pay or pays for via a subscription shall be treated as capital and shall not be available for
contract. Whereas, a certificate of share is a mere distribution as dividends;
tangible evidence of the stock itself which is an
[4] Articles of Incorporation must state the fact that the
intangible property.
corporation issues no-par shares and the number of
CLUE: Unit v. evidence; intangible v. tangible; and not shares;
fully-paid v. fully-paid.
[5] Cannot be issued as preferred stocks;
57. WHAT IS YOUR UNDERSTANDING OF “TREASURY [6] Cannot be issued by banks, insurance companies,
SHARES”? ARE SAID SHARES CONSIDERED: (A) ISSUED; trust companies, building and loan associations, and
(B) FULLY PAID (C) OUTSTANDING (D) ENTITLED TO public utilities; and
DIVIDENDS? (E) MAY SUCH SHARES BE DISTRIBUTED [7] Issued price may be fixed in the Articles of
TO THE STOCKHOLDERS BY WAY OF DIVIDENDS? IF Incorporation, or by the BOD pursuant to authority
YES, HOW WOULD YOU CLASSIFY THE DIVIDEND – conferred upon it by the Articles of Incorporation, or, in
CASH OR STOCK DIVIDEND? the absence thereof, by majority vote of the
Shares that have been earlier issued as fully outstanding shares in a meeting called for the purpose.
corporation by purchase, donation, and redemption or
through some lawful means. 60. WHAT IS THE DOCTRINE OF EQUALITY OF SHARES?

They are considered previously-issued, fully-paid, not Where the articles of incorporation do not provide for
outstandign and not entitled to dividends. any distinction of the shares of stock, all shares issued
by the corporation are presumed to be equal and enjoy
They cannot be issued as dividends because they are
the same rights and privileges and are also subject to
not deemed unrestricted.
the same liabilities.
58. WHAT ARE THE INSTANCES WHEN NON-VOTING
61. WHAT ARE WATERED STOCKS?
SHARES MAY VOTE?
A stock issued in exchange for cash, property, share,
[1] Amendment of articles of incorporation;
stock dividends, or services lesser than its par value.
[2] Adoption and amendment of by‐laws;
62. WHAT IS A CERTIFICATE OF STOCK?
[3] Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate It is a paper representation or tangible evidence of the
property; stock itself and of various interests therein (Tan v. SEC,
[4] Incurring, creating or increasing bonded G.R. No. 95696, Mar. 3, 1992)
indebtedness;
63. WHEN CERTIFICATE OF STOCK MAY BE ISSUED?
[5] Increase or decrease of capital stock;
[a] The certificate must be signed by the president or
[6] Merger or consolidation of the corporation with vice‐president, countersigned by the secretary or
another corporation or other corporations; assistant secretary;
[7 Investment of corporate funds in another corporation [b] The certificate must be sealed with the seal of the
or business in accordance with this Code; corporation;
[8] Dissolution of the corporation. [c] The certificate must be delivered;

59. WHAT ARE THE LIMITATIONS ON THE ISSUANCE OF [d] The par value as to par value shares, or full
“NO PAR VALUE” SHARES? subscription as to no par value shares must be fully
paid, the basis of which is the doctrine of indivisibility of
[1] Cannot have an issue price of less than P5.00 per subscription; and
share;
[e] The original certificate must be surrendered where
[2] Once issued, they shall be deemed fully paid and the person requesting the issuance of a certificate is a
non-assessable and the holders of such shares shall not transferee from the stockholder.
be liable to the corporation or to its creditors in respect
thereto; Of the five above, the short answer is [d]. The
subscription must be fully-paid before the issuance of a
certificate of stock.
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS

64. HOW ARE SHARES OF STOCKS TRANSFERRED? ALLEGED TRANSFER OF STOCKS. IN 1996, VCP MADE A
DEMAND FOR THE ISSUANCE OF CERTIFICATES OF
It depends.
STOCK IN HIS NAME. THE DEMAND WAS DENIED AND
If certified or represent by a certificate of stock, by VCP FILED PETITION FOR MANDAMUS FOR THE
indorsement and recording in the books. ISSUANCE OF THE CERTIFICATES.
If uncertified or not represented by a certificate of A. WILL THE ACTION PROSPER?
stock, by deed of sale, assignment, transfer or
No, the transfer does not bind the corporation because
conveyance and recording in the books.
it was not registered in the corporate books. The
corporate secretary, as far as she is concerned, has the
65. MAY A STOCKHOLDER BRING SUIT TO COMPEL THE
duty to issue certificates of stock only under the name
CORPORATE SECRETARY TO REGISTER VALID
of the owner thereof as registered in the books of the
TRANSFER OF STOCKS?
corporation.
Yes, it is the corporate secretary's duty and obligation to
The remedy to ask for registration of his name as
do so.
stockholder in the books.
[65B] TO BE VALID AND BINDING ON THE
B. IN THE PROBLEM ABOVE, VCP ARGUED THAT IT IS
CORPORATION AND THIRD PARTIES, IS THE
PRECISELY THE DUTY OF THE CORPORATE SECRETARY,
ATTACHMENT OR MORTGAGE OF SHARES OF STOCK
WHEN PRESENTED WITH THE DOCUMENT OF FULLY
REQUIRED TO BE REGISTERED IN THE CORPORATION’S
PAID SHARES, TO EFFECT THE TRANSFER BY
STOCK AND TRANSFER BOOKS?
RECORDING THE TRANSFER IN THE STOCK AND
No, mortgage is a voluntary dealing with shares. TRANSFER BOOK AND TO ISSUE STOCK CERTIFICATES
Involuntary dealings (which are writs or processes IN THE NAME OF THE TRANSFEREE. IS THE
issued or done against shares) are required to be CONTENTION TENABLE?
registered.
Yes, but VCP's remedy is to compel issuance of stock
Involuntary dealing refers to such writ, order or process certificates. His contention would be tenable if the issue
issued by a court of record affecting shares of stocks is registration of transfer and refusal to so register.
which by law should be registered to be effective, and
Insofar as the corporate secretary is concerned, FG is
also to such instruments which are not the willful acts
the registered owner of the shares.
of the registered owner and which may have been
executed even without his knowledge or against his
C. ASSUME THAT VCP CAN VALIDLY FILE THE PETITION
consent.
FOR MANDAMUS. CAN SUCH PETITION BE DISMISSED
66. FG IS AN INCORPORATOR OF VC CORPORATION ON THE GROUND OF PRESCRIPTION CONSIDERING
HAVING SUBSCRIBED TO AND FULLY PAID 239,500 THAT IT WAS FILED ONLY 24 YEARS AFTER THE
SHARES. HOWEVER, NO CERTIFICATE OF STOCK WAS EXECUTION OF THE UNDERTAKING AND
ISSUED TO FG. IN 1968, VCP AND FG SIGNED A INDORSEMENT?
DOCUMENT ENTITLED “UNDERTAKING AND
The law does not prescribe a period within which the
INDORSEMENT” WHICH STATES: “UNDERTAKING: I,
registration of the transfer of shares should be effected.
VCP, IS THE OWNER OF THE TOTAL SUBSCRIPTION OF
Hence, the action to enforce the right does not accrue
FG WITH VC CORPORATION IN THE AMOUNT OF TWO
until there has been a demand and a refusal concerning
HUNDRED THIRTY-NINE THOUSAND FIVE
the transfer.
HUNDRED(P239,500.00) PESOS AND THAT FG DOES
NOT HAVE ANY LIABILITY WHATSOEVER ON THE
67. WHAT ARE THE BASIC RIGHTS OF SHAREHOLDERS?
SUBSCRIPTION AGREEMENT IN FAVOUR OF VC
CORPORATION. (SGD) VCP, CONFORME: (SGD) FG. [a] To manage the corporation by vote;
INDORSEMENT: I, FG IS INDORSING THE TOTAL
[b] To enter into voting trust agreements;
AMOUNT OF TWO HUNDRED THIRTY-NINE THOUSAND
FIVE HUNDRED(P239,500.00) STOCKS OF VC [c] To receive dividends and to compel declaration;
CORPORATION TO VCP. (SGD) FG A. HOWEVER, FG [d] To transfer shares and to compel registration;
REMAINS TO BE THE STOCKHOLDER IN THE BOOKS OF
THE CORPORATION AND IT IS UNDISPUTED THAT VCP [e] To be issued stock certificates;
HAD NOT MADE A REQUEST UPON THE CORPORATE [f] To exercise pre-emptive rights;
SECRETARY OF VC CORPORATION TO RECORD THE
[g] To exercise appraisal rights;
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
[h] To file a derivative suit; In addition to the above, the act complained of must
not be covered by the stockholder's appraisal right.
[i] To recover shares of stock unlawfully sold for
delinquency;
70. WHAT IS A PRE-EMPTIVE RIGHT?
[j] To inspect books;
It is the preferential right of shareholders to subscribe
[k] To be furnished the most recent financial to all issues or disposition of shares of any class in
statements; proportion to their present shareholdings. The purpose
[l] To be issued a new certificate in case of loss or of this right is to enable the shareholder to retain his
destruction; proportionate control in the corporation and to retain
his equity in the surplus.
[m] To have the corporation dissolved;
[n] To participate in the distribution of assets upon 71. EXPLAIN THE APPRAISAL RIGHT AND WHERE IT
dissolution; and MAY BE EXERCISED?
[o] In case of close corporations, to petition the SEC to It is the right to withdraw from the corporation and
arbitrate in the event of deadlock. demand payment of the fair value of the shares after
dissenting from certain corporate acts involving
68. WHAT ARE THE OBLIGATIONS OF A STOCKHOLDER? fundamental changes in corporate structure. The
amount paid to the stockholder is the fair value of his
[a] To pay the balance of his unpaid subscription/s;
shares as of the day prior to the date on which the vote
[b] To pay interest on his unpaid subscriptions according was taken, excluding any appreciation or depreciation in
to the by-laws or the contract; anticipation of the corporate action
[c] To pay creditors of the corporation with respect to The following are instances when it may be exercised:
his unpaid subscription based on the Trust Fund
[a] Extension or reduction or corporate term;
Doctrine;
[b] Amendment to Articles of Incorporation which
[d] To pay for the water in his stocks;
involves change in the rights of stockholders, authorize
[e] In case of corporation by estoppel, to be liable as a preferences superior to those stockholders, or restrict
general partner; and the right of any stockholder;
[f] In case of close corporations, to be personally liable [c] Investment of corporate funds in another business
for torts if he actively participates in the management or purpose;
of the corporation.
[d] Sale or disposal of all or substantially all assets of the
corporation; and
69. WHAT IS A DERIVATIVE ACTION AND ITS
REQUISITES? [e] Merger or consolidation.

A derivative suit is a remedy under common law 72. WHAT ARE THE REMEDIES OF CORPORATIONS TO
available to any stockholder in case where corporate ENFORCE PAYMENT OF STOCKS?
directors have committed a breach of trust or fraud,
negligence or ultra vires acts which have caused directly There are three available remedies: (a) call (to action)
injury to the corporation and indirect injury to the by resolution of the governing board and sale of
stockholders AND in case the governing board is delinquent shares; and (b) judicial action via a collection
unwilling or unable to institute an action to redress the suit.
wrong.
73. WHAT DOES THE TERM UNPAID CLAIM MEAN (FOR
The requisites are:
PURPOSES OF DECLARING THE SHAREHOLDER
[a] The party bring the suit should be a shareholder at DELINQUENT)?
the time the act or transaction complained of took
The corporation may refuse to register the transfer of
place;
shares if it has an existing unpaid claim over the shares
[b] He has exhausted all intra-corporate remedies; and to be transferred. The “unpaid claim” refers to the
[c] The cause of action actually belong to the unpaid subscription on the shares transferred and not
corporation, not to the stockholder. to any other indebtedness that the transferor may have
to the corporation.

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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS

74. WHAT IS THE PROCEDURE FOR COLLECTION AND [a] Book for the minutes of shareholder and board
DELINQUENCY SALE? meetings;

[a] If there is due date, no need for a call by the board. [b] Record of transactions;
If there is none, there must be a board resolution [c] Stock and transfer book; and
declaring the unpaid subscription due on a specified
date; [d] Other books required to be kept.

[b] Personal notice or notice by registered mail must be 77. WHAT IS THE PROBATIVE VALUE OF THE STOCK
sent and addressed to the concerned stockholder; AND TRANSFER BOOK?
[c] If he fails to pay within 30 days from call or due date, The entries are considered prima facie evidence of the
the unpaid shares shall be subjected to delinquency matters stated therein and may be subject to proof to
sale; the contrary. (G.R. No. 123553)
[d] Board resolution ordering the sale must be issued
stating the amount, date, time and place of sale; 78. WHAT ARE THE REQUIREMENTS FOR THE EXERCISE
OF THE RIGHT OF INSPECTION?
[e] The sale shall shall be made not earlier than 30 days
but not later than 60 days from date of delinquency; [a] It must be exercised at reasonable hours on business
days;
[f] Note of sale with a copy of the board resolution shall
be send to every delinquent shareholder in person or by [b] The stockholder has not improperly used any
mail; information he has secured through any previous
examination; and
[g] Publication of notice of sale for 2 consecutive weeks;
[c] Demand is made in good faith or for a legitimate
[h] Sale to the bidder who offered the full amount of
purpose.
the balance of subscription including all costs for the
smallest number of shares;
79. DISTINGUISH
[i] Registration in the name of the winning bidder and
issuance of certificate under his name; A. MERGER FROM CONSOLIDATION

[j] Remaining (paid) shares shall be credited to the Merger happens when a corporation absorbs another.
delinquent shareholder; and On the other hand, consolidation occurs when two or
more corporations form one new corporation.
[k] If there is no bidder, the corporation may purchase
and pay for the shares. In the first, one corporation survives. In the second, all
constituent corporations are dissolved.
75. WHAT ARE THE EFFECTS OF STOCK DELINQUENCY? In the first, no new corporation is created. In the
second, a single, new corporation emerges.
No delinquent stock shall be voted for or be entitled to
vote or to representation at any stockholder’s meeting, In the first, assets and liabilities are acquired by the
nor shall the holder thereof be entitled to any of the surviving corporation. In the second, they are
rights of a stockholder except the right to dividends in transferred to the new corporation.
accordance with the provisions of this Code, until and
B. ESTOPPEL FROM SUBSEQUENT COMPLIANCE
unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of A corporation by estoppel is a legal device to protect
advertisement, if any. the corporation or third persons from deceit or fraud in
dealings. Hence, despite lack of registration of the
Any cash dividends due on delinquent stock shall first
corporation, the law treats those who purport to act as
be applied to the unpaid balance on the subscription
a corporation liable as a corporation.
plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his On the other hand, subsequent compliance with legal
unpaid subscription is fully paid. requirements for incorporation makes the corporation
one de facto prior to such compliance.
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a stockholder.
80. WHAT IS THE EFFECT OF NON-USE OF CORPORATE
CHARTER AND CONTINUOUS INOPERATION OF
76. WHAT BOOKS ARE REQUIRED TO BE MAINTAINED
CORPORATION?
BY THE CORPORATION?

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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
Revocation or forfeiture of the franchise or certificate of authorize dissolution and it must be certified and
incorporation due to its misuse or non‐use pursuant to countersigned.
quo warranto proceedings filed by the Solicitor General.
If voluntary and there are creditors affected, by filing a
Under the old corporation code, failure to organize and verified petition for dissolution with the SEC.
commence business within 2 years from incorporation
Voluntarily, there may also be a dissolution by
results in its corporate powers ceasing and the
shortening the corporate term. This is done by
corporation shall be deemed dissolve.
amendment.
In the new law, the period is 5 years and the effect is
Voluntarily, in the case of corporate soles, mere filing of
"deemed revoked."
a declaration of dissolution by the presiding elder.
Under the old law, in case of continuous inoperation for
Voluntarily, by merger or consolidation.
at least 5 years, this is a ground for the suspension or
revocation of corporate franchise or certificate of Voluntarily, by expiration of corporate term without
incorporation. extension. Note that, under the new law, there is no
perpetual corporate existence.
In the new law, the same period is prescribed but the
effect is "declaration of delinquency status" which may Involuntarily, the following are modes of dissolution:
be removed by compliance within 2 years. [a] By expiration but with failure to extend;
81. IN THE ARTICLES OF INCORPORATION OF T [b] Failure to organize and commence;
CORPORATION, ELEVEN MEMBERS WERE NAMED TO
CONSTITUTE THE BOARD OF DIRECTORS. THESE ELEVEN [c] Continuous inoperation and delinquency for more
ELECTED FROM AMONG THEMSELVES A SECRETARY- than 2 years;
TREASURER BUT DID NOT ELECT A PRESIDENT. THE [d] Legislative dissolution; and
BOARD USED TO HOLD MEETINGS TO TRANSACT
[e] Dissolution by the SEC.
BUSINESS, WHICH WAS DONE THROUGH THE
SECRETARY-TREASURER. IN A PROCEEDING TO FORFEIT
83. WHAT IS LIQUIDATION?
ITS CHARTER, THE QUESTION WAS POSED AS TO
WHETHER THE CORPORATION MAY BE CONSIDERED TO Liquidation is the process by which all the assets of the
HAVE FORMALLY ORGANIZED. RESOLVE THE QUESTION. corporation are converted into liquid assets (cash) in
order to facilitate the payment of obligations to
There are two views on this.
creditors, and the remaining balance if any is to be
In Benguet Consolidated Mining v. Pineda, the Supreme distributed to the stockholders. It is a proceeding in
Court held that formal organization means that the rem.
corporation has taken necessary steps to endow it with
the capacity to transact legitimate business in line with 84. WHAT CONSTITUTES “DOING BUSINESS” IN THE
its purpose. The Court said that this includes the PHILIPPINES FOR FOREIGN CORPORATIONS?
election of officers, adoption of by-laws, subscription
and payment transactions and other steps. [a] Under the Continuity Test, doing business implies a
continuity of commercial dealings and arrangements, or
However, Ladia (2015) opines that it is enough that the performance of acts normally incidental to the purpose
corporation has functioned and engaged in the business and object of the organization.
for which it was formed and its charter cannot be
forfeited simply because it has failed to a president or a [b] Under the Substance Test, a foreign corporation is
secretary. doing business in the country if it is continuing the body
or substance of the enterprise of business for which it
82. HOW MAY A CORPORATION DISSOLVE? AND was organized.
WHAT ARE THE MODES OF DISSOLUTION? WHAT ARE [c] Under the contract test, a foreign corporation is
THE EFFECTS? doing business in the Philippines if the contracts
entered into by the foreign corporation or by an agent
It is the extinguishment of the franchise of a
acting under the control and direction of the foreign
corporation and the termination of its corporate
corporation are consummated in the Philippines.
existence. Dissolution may be voluntary or involuntary.
[d] Under statutory definition, doing business means:
If voluntary and there are no creditors affected, it is
done by filing a resolution approved by the board and [i] Soliciting orders, service contracts, or opening
the stockholders with the SEC. This resolution must offices;
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 100 QUESTIONS AND ANSWERS IN CORPORATION LAW EXAMS
[ii] Appointing representatives, distributors domiciled in voting stock or voting rights is owned or controlled by
the Philippines or who stay for a period or periods another corporation which is not a close corporation.
totaling 180 days or more;
Any corporation may be incorporated as a CLOSE
[iv] Participating in the management, supervision, or incorporation, EXCEPT:
control of any domestic business, firm, entity, or
[a] Mining or oil companies;
corporation in the Philippines; or
[b] Stock exchanges;
[v] Any act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to some [c] Banks;
extent the performance of acts or works or the exercise [d] Insurance companies;
of some functions, normally incident to and in
progressive prosecution of the purpose and object of its [e] Public utilities;
organization. [f] Educational institutions; and
According to the Supreme Court, it relates to “business [g] Corporations declared to be vested with public
activities… not only casual, but so systematic and interest.
regular as to manifest continuity and permanence of
activity to constitute doing business here…” To 88. CAN A NON-STOCK CORPORATION OFFSET UNUSED
constitute doing business in the Philippines, the activity CONTRIBUTIONS OF MEMBERS AGAINST THE BALANCE
should involve profitmaking. OF RECEIVABLES FROM THE SAME MEMBERS?

85. DOES AN “ISOLATED TRANSACTION” BY A FOREIGN The unused contributions of members cannot be offset
CORPORATION QUALIFY AS “DOING BUSINESS” IN THE against the balance of receivables because this would
PHILIPPINES? amount to distribution of the capital of the corporation.
Members of a non‐stock corporation are not entitled to
No. Foreign corporations, even unlicensed ones can sue distribution of capital. They are only entitled to
or be sued on a transaction or series of transactions set distribution of capital upon dissolution when it is
apart from their common business in the sense that provided for in the articles of incorporation or by‐laws.
there is no intention to engage in a progressive pursuit
of the purpose and object of business transaction.

86. EXPLAIN THE CONTRACT TEST OF “DOING

BUSINESS” IN THE PHILIPPINES.
Under the contract test, a foreign corporation is doing
business in the Philippines if the contracts entered into
by the foreign corporation or by an agent acting under
the control and direction of the foreign corporation are
consummated in the Philippines.

87. WHAT ARE THE REQUIREMENTS FOR CLOSE

CORPORATIONS?
A close corporation is onee whose articles of
incorporation provide that:
[a] All issued stock, exclusive of treasury shares, shall be
held by persons not exceeding 20;
[b] All issued stock shall be subject to one or more
specified restrictions on transfer; and
[c] The corporation shall not list in any stock exchange
or make any public offering of any of its stock of any
class.
Notwithstanding the foregoing, a corporation shall not
be deemed a close corporation when at least 2/3 of its

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