Training and Convention Division

University of the Philippines College of Law

SUGGESTED ANSWERS TO THE

2021 MOCK BAR EXAMINATIONS IN
MERCANTILE LAW

Marlon was elected as Director of ABC Corporation. The ABC By-laws

provide that a Director must be the record and beneficial owner of 1,000 ABC
shares of stock. Ronaldo, another stockholder of ABC, filed a complaint in
the Securities Exchange Commission to remove Marlon on the ground that
he is disqualified as the stock and transfer books of the corporation do not
show that Marlon owns 1,000 ABC shares.
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In his Answer, Marlon argued that (i) the dispute is intra-corporate and the
SEC has no jurisdiction over the case, and (ii) the By-law provision is invalid
as poor stockholders cannot be elected Directors.

Is Marlon correct? (5 points)

SUGGESTED ANSWER:

Marlon is incorrect.
i. While it is true that the dispute is intra-corporate in that it
involves the election of a Director, under the Revised Corporation
Code, Section 27, jurisdiction over cases involving the removal of
Directors on the ground of disqualification is now with the SEC.
(3 points)
ii. In Government v El Hogar, the Supreme Court ruled that a by-
law provision requiring minimum share ownership by Directors
is valid. The reason is that the Director would have sufficient
economic interest in the success of the corporation. (2 points)

II

Merri-Mart operates a grocery store. It has a credit line from BPI which
registered with the PPSA Registry security interest over “all inventory.” Elsa
bakes and she wants to supply Merri-Mart with ensaymadas. Merri-Mart is
agreeable, but would acquire the ensaymadas only on credit, payable within
90 days from delivery. Elsa is wary that (i) BPI’s security interest over “all
inventory” will always enjoy priority over any rights that Elsa may have

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 over the ensaymadas, and (ii) once the ensaymadas are sold, she will become
unsecured.
(a) Is there any way by which Elsa’s rights over the ensaymadas may
enjoy priority over BPI’s security interest over all inventory? (2.5
points)
(b) Is Elsa correct that she will become unsecured once the ensaymadas
are sold? (2.5 points)

Assume that the PPSA Registry is already operational.

SUGGESTED ANSWER:

a. Yes. As unpaid seller of the ensaymadas, Elsa may have Purchase

Money Security Interest (PMSI) over the ensaymadas, and as PMSI-
creditor, Elsa will have priority over the security interest of BPI. To
“trump” the previously registered security interest of BPI, Elsa will
have to (1) send notification to BPI before Merri-Mart receives
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possession of the first delivery of ensaymadas (which notification will

cover all deliveries by Elsa to Merri-Mart), and (2) register her PMSI in
the PPSA registry when Merri-Mart receives deliveries of the
ensaymadas.

b. Elsa is NOT correct that she will become unsecured. Her perfected
PMSI extends to the proceeds of the sold ensaymadas, which proceeds
are presumably in the form of money, accounts receivable, or deposit
accounts, and even if these proceeds are commingled with other
moneys, accounts receivables and funds in the deposit accounts of
Merri-Mart.

III

You work for an RTC Judge. He asked you to study and recommend
decision on the following:

In mid-2020, with the lockdown in Luzon, DEF Corp., a bank (and thus,
allowed to operate as part of an essential industry) entered into a contract
with Clarita Bus Company, a common carrier, whereby Clarita would
transport DEF employees exclusively, observing the required health
protocols. In the mornings, Clarita buses, driven by Clarita drivers, would
pick up DEF employees from designated points and bring them to DEF
offices and branches. In the afternoons, the Clarita buses and drivers would
bring back the DEF employees to the designated points.

Two cases arose:

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 (a) A Clarita driver took some local brandy during the day. In the
afternoon, he drove the bus into the shed in a drop-off point causing
injuries to DEF employees. The DEF employees sued Clarita claiming
breach of contract of carriage. Are the employees correct? (2 points)
(b) On that afternoon, Pedro was in the shed as he always had been
waiting for the Clarita bus. Out of compassion, Clarita drivers (with
the acquiescence of the DEF employees on board) had allowed Pedro
to get on the bus from that point until the next stop; occasionally, Pedro
would give the driver some food as token of his appreciation. As fate
would have it, Pedro was hit and injured when the driver drove the
bus into the shed. Pedro sued both DEF and Clarita. DEF and Clarita
filed cross-claims against each other. What company/ies is/are liable
to Pedro? (3 points)

SUGGESTED ANSWER:

a. No, the employees are NOT correct. DEF was not acting as a common
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carrier in the transport of DEF employees. Instead, it was acting as an

independent contractor or a private carrier. As the contract for transport
was between DEF and Clarita, the DEF employees cannot sue based on
breach of contract; it is DEF that would have such cause of action. Even
so, (assuming that the pleadings filed by the DEF employees allow for
alternative causes of action) Clarita may be held liable to the DEF
employees based on quasi-delict if the latter are able to prove that
Clarita was negligent in the selection and supervision of its drivers.

b. As Clarita (through its drivers) had habitually engaged in transporting

Pedro from one point to another, it appears that the relationship
between Clarita and Pedro is one of contract of carriage. It may even
be said that Pedro gave consideration when he gave food to the drivers.
When Pedro was hit, a contract of carriage was already in effect as Pedro
was there for the purpose of boarding the bus. Clarita failed to exercise
extraordinary diligence as the driver was drunk. Thus, Clarita is liable
to Pedro for breach of contract of carriage.

DEF is not liable to Pedro. The acquiescence of the employees to Pedro

boarding the bus cannot be imputable to DEF as transportation is
outside the business of DEF, a bank. As Pedro’s injuries were not
caused by DEF, it cannot be held liable to Pedro.

IV

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 HoldCo, Inc. is a holding company that has subsidiaries Sub1, Sub2, and
Sub3. The total credit commitment of PQR Bank to the HoldCo Group is
almost 20% of the net worth of the bank. HoldCo acquired a new subsidiary
Sub4 that is engaged in sugar milling. In the ordinary course of business,
Sub4 issues quedans to itself as its share of the sugar milled.
(a) What is the Single Borrower’s Limit? What is its purpose? (3 points)
(b) May the HoldCo Group obtain additional loans from PQR Bank? (2
points)

SUGGESTED ANSWER:

a. The Single Borrower’s Limit imposes a ceiling on the total credit

commitment of a bank to a single borrower. Under Section 35 of the
General Banking Law of 2000, the SBL shall not exceed 20% of the net
worth of the bank. In the case of corporations such as HoldCo,
liabilities of subsidiaries are included in the computation of the SBL.
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The purposes of the SBL are: (i) to prevent excessive loans and other
credit accommodations to a single borrower, (ii) to allocate bank
resources to different sectors, (iii) to safeguard the bank from too large
a risk exposure to a single client, and (iv) as a prudential measure, it is
a damage control mechanism

b. Yes, the HoldCo Group may obtain additional loans from PQR Bank.
An additional 10% of the net worth of PQR is allowed, provided that
the additional liabilities are adequately secured by trust receipts,
shipping documents, warehouse receipts or other similar documents,
transferring or securing title covering readily marketable, non-
perishable goods fully covered by insurance. The quedans held by
Sub4 qualify as security for the additional 10% as they are warehouse
receipts.

S subscribed to shares of stock of XYZ Corp. Pending full payment of the

subscription price, S sold the shares to B.
(a) Is the sale from S to B valid? (2 points)
(b) Together with the Contract of Sale in favor of B, S also issued a proxy
in favor of B. XYZ refused to recognize the proxy. Does B have a cause
of action against XYZ? (3 points)

SUGGESTED ANSWER:

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 a. Yes, the sale is valid but only as between S and B. As a general rule,
the sale of shares of stock requires endorsement and delivery of the
stock certificate covering the shares, and recording of the sale in the
books of the corporation; otherwise, it is binding on the seller and
buyer only. However, a stock certificate may be issued only after full
payment of the subscription price. Hence, the requirements of
endorsement and delivery cannot be complied with. Thus, the sale is
valid only as between S and B.

b. No, B has no cause of action against XYZ. The sale between S and B is
not binding on third parties, including XYZ, as the triple requirements
of endorsement-delivery-recording has not been complied with. Thus,
as far as XYZ is concerned, B is not a stockholder. And the cause of
action to enforce a proxy belongs to the stockholder-principal S. A
proxy is a form of agency, and B, as agent, is not the proper party to
bring the action against XYZ. It is S who has a cause of action.
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VI

a) What is Insider Trading? Why is it prohibited? (2.5 points)

b) May the Director of a corporation that is NOT listed on the Philippine
Stock Exchange be held guilty of insider trading? (2.5 points)

SUGGESTED ANSWER:

a. Insider trading is the sale or purchase of securities by an insider

defined to include the issuer, a Director, Officer, and other persons who
have material non-public information, but does NOT disclose such
information to the buyer or seller of the securities, or proves that the
buyer or seller is also in possession of the information. Under the
Securities Regulation Code, insider trading is unlawful and an insider
found guilty of insider trading is civilly and criminally liable.

b. Yes. The SRC applies not just to listed companies, but also to (i)
companies that have securities registered with the Securities and
Exchange Commission, and (ii) companies that have total assets of at
least Php 50 million and at least 200 stockholders owning at least 100
shares each.

VII.

In 2021, Fernanda, a musician from Lapu-Lapu, composed the song

“Quincentennial” to commemorate the 500th anniversary of the “discovery”
by her namesake of the islands that eventually became the Philippines. The

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 first few bars of the Quincentennial refrain sounded very similar to
“Quadricentenial” which Tomas submitted in the competition for the official
song when his school UST celebrated its 400th founding anniversary.
Quadricentennial placed 5th in the competition and was soon forgotten,
except by Tomas and his very close friends. While Fernanda has lived most
of her life in Lapu-Lapu, during the finals of the competition for the UST
anniversary song, her family was visiting Manila and they brought the very
young but already musically-inclined Fernanda to watch the competition in
UST. Tomas sued Fernanda.

(a) Is Fernanda liable for copyright infringement? (2 points)

(b) Her lawyer invoked the following defenses: (i) Quincentennial is an
original creation, and (ii) assuming without admitting (to add a favorite
phrase of lawyers) that there was copying, it was Fair Use. Rule on
Fernanda’s defenses. (3 points)

SUGGESTED ANSWER:
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a. Yes. Fernanda is liable for copyright infringement. As composer of

Quadricentennial, Tomas owns the copyright and he has rights that
include the exclusive right to reproduce, copy or publish his works.
Fernanda’s violation or usurpation of these rights – even if it is just a
“few bars” -- constitutes copyright infringement.

b. Neither defense is tenable. A work that is original and created

independently, even if there are similarities appearing in other works,
is a defense in a copyright infringement case. However, it is difficult to
believe Fernanda’s claim that the bars in the Quincentennial that are
similar to those in Quadricentennial are her original work, as she heard
the Quincentennial and she was already musically-inclined at that
time.

Neither is Fair Use available as defense. Fair Use generally falls into 2
categories (1) commentary and criticism, or (2) parody. Quincentennial
is neither. Indeed, both are intended to be celebratory songs in
milestone events.

VIII

Karlo invited his friends Angela and Steven to form a corporation that will
engage in construction. Angela and Steven agreed and gave Karlo their
contributions. Karlo did not file any Articles of Incorporation, but
contracted in his own name with Elizabeth for the construction of the latter’s
house. The house was not completed. Elizabeth sued Karlo. Karlo filed a

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 third-party complaint against Angela and Steven claiming that they had
formed a de facto partnership or a de facto corporation.
(a) Is Steven correct? (3.5 points)
(b) Who is/are liable to Elizabeth? (1.5 points)

SUGGESTED ANSWER:

a. No, Steven is not correct. The agreement was to form a corporation, not
a partnership; thus, there was no de facto partnership. Neither was a
de facto corporation formed. One of the requirements for a de facto
corporation is colorable compliance with the Revised Corporation
Code requirements on incorporation. Since no Articles of
Incorporation were filed, there can be no de facto corporation. And
even assuming that a de facto corporation, it would be such de facto
corporation that would be liable, and not Angela and Steven, under the
doctrines of separate personality and limited liability.
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b. Only Karlo, in his personal capacity, is liable to Elizabeth as no de facto

partnership nor de facto corporation was formed. The contract was in
his own name.

IX

LMN Corporation and Investor enter into a contract whereby LMN sells to
Investor at the Php 1.00 par value (i) 100 shares out of its authorized but
unissued capital stock, and (ii) 200 treasury shares.
(a) Does the Revised Corporation Code require any minimum payment
on the sale? (1.5 points)
(b) After paying the initial amount of Php 1.00 on the contract, Investor
defaults. May LMN rescind the entire or a portion of the contract? (3.5
points)

SUGGESTED ANSWER:

a. No. The Revised Corporation Code requires the 25% minimum

subscription and 25% minimum payment only in connection with an
increase in authorized capital stock. The sale to Investor does NOT
involve an increase in authorized capital stock as the shares will come
from authorized but unissued shares, and treasury shares.

b. LMN may rescind only the portion of the contract relating to the 200
treasury shares. The contract has 2 components: (i) subscription to 100
shares, and (2) sale of 200 treasury shares. A subscription contract can
NOT be rescinded because of the Trust Fund Doctrine. However, the

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 sale of treasury shares may be rescinded. There would be no violation
of the Trust Fund Doctrine because the shares had been fully paid
before they became treasury shares.

FL Corp. is a Florida, USA corporation engaged in manufacturing medical

and hospital supplies. It wants to appoint Dy Dee & Es Corp. as its exclusive
Philippine distributor

(a) FL seeks your advice on how to structure the distributorship

agreement. It does not want to put up a Philippine branch, but wants
the flexibility to sue Dy Dee & Es in Philippine courts in case of breach
of the agreement. What do you recommend? (2 points)
(b) Dy Dee & Es says that it does not have the requisite capital and
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logistics for the distributorship that you recommended in (a). (It only
has the connections ☺.) FL asks you (i) whether there is an alternative
contractual structure, and (ii) whether under that alternative structure,
FL can still sue Dy Dee & Es in Philippine courts even without putting
up a Philippine branch. What do you tell FL? (3 points)

SUGGESTED ANSWER:

a. FL should appoint DDS as an independent exclusive distributor, i.e.,

DDS should transact business in its own name and for its own account,
and NOT for the account of FL. By virtue of this independence
principle, FL will NOT be deemed to be doing business in the
Philippines, and FL will be able to sue in Philippine courts
notwithstanding that it did not put up a Philippine branch and secure
a license to do business in the Philippines.

b. Yes, the alternative structure is for DDS to be a distributor that transacts

business in the name and for the account of FL; in other words, DDS
will be deemed an agent of FL. In this case, FL will be deemed to be
doing business in the Philippines for which a license to do business is
normally required to be able to sue in Philippine courts. However, as
DDS will know that FL does not have a license, and will have benefited
from the distributorship, FL will still be able to sue DDS in Philippine
courts under the principle of estoppel.

XI

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 M/V Don Manolo left the port of Aden in Yemen for the Philippines.
Enroute to Manila, the crew smelled something burning but paid no
attention to it. After 24 hours, the crew discovered that the textiles stored in
the cargo hold were burning. It was too late to fight the fire and nothing was
left. Upon reaching Manila, Mr. Logan, a consignee of the textile sued the
owners of M/V Don Manolo who argued that they should not be liable as
fire is a fortuitous event. Are the owners of M/V Don Manolo correct? (5
points)

SUGGESTED ANSWER:

No. In this jurisdiction, fire is not recognized as a fortuitous event. In

Eastern Shipping v. IAC, 150 SCRA 463, it was held that: “However, we
are of the opinion that fire may not be considered a natural disaster or
calamity. This must be so as it arises almost invariably from some act of
man or by human means. It does not fall within the category of an act of
God unless caused by lightning or by other natural disaster or
calamity. It may even be caused by the actual fault or privity of the
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carrier.

“Article 1680 of the Civil Code, which considers fire as an extraordinary

fortuitous event refers to leases of rural lands where a reduction of the
rent is allowed when more than one-half of the fruits have been lost due
to such event, considering that the law adopts a protective policy towards
agriculture.

“As the peril of fire is not comprehended within the exceptions in Article
1734, supra, Article 1735 of the Civil Code provides that in all cases other
than those mentioned in Article 1734, the common carrier shall be
presumed to have been at fault or to have acted negligently, unless it
proves that it has observed the extraordinary diligence required by law.”

XII

Dr. Ri was the Research Manager of Cloy Inc., a pharmaceutical company.

The company applied for a patent for a new drug yonsericol, on 1 January
2018. The patent was issued in June 2020.

However, it appears that way back in 2016, Dr Ri had given a lecture at a

doctor’s convention held at UP PGH on the use of the yonsericol drug to treat
arthritis. Dr Ri’s lecture was circulated electronically to the convention
participants. Dr Ri’s talk contained a report on the general features of his
new invention.

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 Dr. Seo, an employee of a competing pharmaceutical company, Descendants
Inc., and who attended Dr. Ri’s lecture in 2016, subsequently discussed Dr
Ri’s research with their company’s legal advisers. Descendants decided to
file a cancellation case against Cloy in relation to the yonsericol patent.

Discuss the chances of successfully challenging Cloy Inc.’s patent. (5 points)

SUGGESTED ANSWER:

The patent may be revoked if the invention is not new or not patentable.

However, it appears that Dr. Ri disclosed only the general features of the
patent in his lecture. There was no precise description of the invention.
Hence, the invention remained new and may work against the likelihood
of successfully challenging the validity of Cloy Inc.’s patent.

Cloy Inc.’s patent may be successfully challenged if Descendant’s Inc. can

prove that the lecture in 2016 constitutes a disclosure of the claims of the
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invention.

XIII

In a sale transaction, can there be BOTH a commercial letter of credit and a

stand-by letter of credit? Why or why not? (2.5 points)

SUGGESTED ANSWER:

There can be BOTH. The 2 letters of credit will serve different purposes:
1. The commercial letter of credit serves as a mode of payment of the
purchase price. Thus, the applicant would be the buyer, while the
beneficiary would be the seller.
2. The stand-by letter of credit serves as security and indemnity for
default. Since the seller and the buyer can both default on the sale, an
SBLC from either party to the other is proper.

XIV

UVW Corp. has been profitable. It wants to raise funds for its expansion,
but the high par value of its shares deters prospective investors. Its Chief
Finance Officer presents to you the following proposal:
Current Capital CFO-Proposed Capital
Structure Structure

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 Authorized capital Php 500,000,000 Php 500,000,000
stock
Number of Shares 500,000 50,000,000
Par Value per share Php 1,000 Php 10

By making the par value much lower, the CFO expects that its shares will be
more affordable and attract more investors. He has the following questions
for you:
(a) Do the stockholders need to approve the proposed changes? Is a
stockholders’ meeting required? (3 points)
(b) What happens to the shares of existing stockholders whose stock
certificates show Php 1,000 par value per share? (2 points)

SUGGESTED ANSWER:
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a. Yes, the stockholders need to approve the proposed changes. What the
CFO wants is called a stock split which requires an amendment to the
Seventh Article of Incorporation. Amendments to the Articles of
Incorporation require the approval of stockholders owning at least 2/3
of the outstanding capital stock, including non-voting shares.

No, a stockholders’ meeting is not required. Stockholders approve

amendments to the Articles of Incorporation either via written assent
or in a stockholders’ meeting. But only specific amendments to the
Articles require a stockholders’ meeting. The CFO proposal does NOT
entail an increase in the authorized capital stock; it remains at Php 500
million. Thus, even as a stock split is an amendment to the Seventh
Article, because there is no increase in authorized capital stock, the
other mode of securing stockholders’ approval – written assent – is
available to UVW.

b. The current stockholders should surrender their existing stock

certificates to be replaced with new ones reflecting the stock split, i.e.,
higher number of shares and lower par value. But even if an existing
stock certificate is not so replaced, the stockholder will be deemed to
be holding the higher number of shares, but at the lower par value.

XV

What does the warranty of SEAWORTHINESS cover? (2.5 points)

SUGGESTED ANSWER:

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 A warranty of seaworthiness extends not only to the condition of the
structure of the ship itself, but requires that it be properly laden, and
provided with a competent master, a sufficient number of competent
officers and seamen, and the required appurtenances and equipment, such
as ballasts, cables and anchors, cordage and sails, food, water, fuel and
lights, and other necessary or proper stores and implements for the
voyage.

● Generally, must be adequately equipped for the voyage and manned

with a sufficient number of competent officers and crew (Vide Civil
Code, Art. 1755, re duty of a common carrier in a contract of carriage)
● Nature of Ship: she must be in a suitable condition to carry the
particular cargo. Not necessary that the cargo itself be seaworthy
● Nature of Voyage: Varies with character of particular voyage e.g., canal,
river, ocean, lake
● Nature of Service: Reasonably capable of safely carrying the cargo to
its port of destination
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XVI

Efforts to rehabilitate BKRPT Corporation failed, and upon motion, the

Rehabilitation Court ordered the conversion of the proceedings to
Liquidation. The following are among assets and liabilities of BKRPT:

i. Cash in BPI. BPI had granted a loan to BRPT that included a standard
set-off provision.
ii. Equipment, such as air-conditioning units. The third-party contractors
maintaining them have not been fully paid.
iii. Land. Some real property taxes were outstanding, and the BPI loan in
(i) above is secured by a registered real estate mortgage on the
property.
iv. Other vendors, e.g. sellers of office supplies, have also not been paid.

How will the assets be applied to the liabilities of BKRPT? (7.5 points)

SUGGESTED ANSWER:

As there is a proper insolvency proceeding, the rules on concurrence and

preference of credits will apply in satisfying the obligations of BKRPT.

With respect to the movables (personal property), the Personal Property

Security Act (PPSA) has repealed the relevant provisions of the Civil
Code. Under the PPSA, a security interest perfected prior to the
insolvency proceedings remains perfected and retains its priority.

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 Only BPI has a perfected security interest in a movable, namely, the cash
in BPI. A deposit taking institution (BPI) perfects its security interest over
a deposit account via control through a set-off provision.

Article 2242, Civil Code applies to the liquidation of the land. The real
property taxes will be preferred over the BPI REM. In other words, the
proceeds from the sale of the land will be applied to the real property taxes
first before they will be applied to the BPI mortgage.

The other creditors (e.g., the third party contractor maintaining the A/Cs
and the sellers of office supplies) do not appear to have perfected security
interest. In particular, the A/C contractor no longer enjoys a special
preferred credit as Art. 2241 has been repealed. Hence, the other creditors
are considered common creditors whose claims will be satisfied out of the
proceeds of the office equipment, the free asset.
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XVII

Philhealth issued several crossed checks in the total amount of Php 1million
payable to Philhealth members in payment of their benefits. However, the
Philhealth employees in charge of issuing the checks to member-
beneficiaries, fraudulently diverted them and deposited the checks to their
own accounts with CLT Bank and appropriated the proceeds for their
personal benefit.

Philhealth now sues both the drawee bank (DRW Bank) and the
collecting/depositary bank (CLT Bank) for damages.

What is the liability of the two banks, applying the required diligence for
banks? Discuss whether the fraud committed by the employees of Philhealth
constitutes contributory negligence and a defense of the banks. (5 points)

SUGGESTED ANSWER:

Under the General Banking Law, banks are required to exercise

extraordinary diligence or the highest degree of diligence since their
business is imbued with public interest.

Here, DRW Bank failed to comply with its obligation to pay in accordance
with the instructions of its client, Phillhealth, as the drawer of the checks:
that is, to pay to the named payees of the checks, the Philhealth members-
beneficiaries. Instead, the checks were paid to the employees of
Philhealth. Accordingly, DRW Bank is liable to its client.

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 On the other hand, CLT Bank is also liable for failing to exercise due
diligence in the acceptance of checks deposited to the accounts of the
Philhealth employees that are on their face payable to other persons. Had
CLT exercised proper diligence in inquiring on why the checks are being
deposited to the accounts of Philhealth employees, it would have
discovered that they are not entitled to the proceeds of the checks.

Both banks cannot invoke the defense that there was fraud perpetrated by
the Philhealth employees. Even if there be contributory negligence on the
part of Philhealth, both banks cannot escape liability as the crossing of the
check is a warning that the check should be deposited only in the account
of the payee.

CLT Bank, as collecting bank, is obliged to ascertain that the check be

deposited to payee's account only and should scrutinize the check and to
know its depositors before it could make the clearing indorsement "all
prior indorsements and/or lack of indorsement guaranteed". On the hand,
the DRW bank owes to Philhealth an absolute and contractual duty to pay
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the proceeds of the checks only to the payees thereof.

XVIII

Atin pa rin ‘to, Inc. is being organized as a non-stock corporation formed for
the training of student-athletes. The organizers approached you for advice
in drafting their Articles of Incorporation and By-Laws, specifically on the
following:

(a) There are 17 organizers. Can 17 of them be all incorporators and

members of the Board of Trustees? (2.5 points)
(b) What will be the provision on the term of office of the Trustees? (2.5
points)

SUGGESTED ANSWER:

a. Only 15 can be incorporators, but 17 can be Trustees. Section 10 limits

incorporators to 15, regardless of class of corporation. i.e., whether stock
or non-stock. Under Section 91, the Articles of Incorporation or By-laws
may the fix number of Trustees to more than 15.

b. Under Sections 23 and 91 of the Revised CorporationCode, the term of

office of Trustees is NOT MORE than 3 years. Thus, the By-laws may
provide for any term not exceeding 3 years. Unlike the old Corporation
Code (BP 129), and educational non-stock (and Atin pa rin’to is NOT
an educational non-stock), there is no more requirement of staggering

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 of terms of Trustees of non-stock corporations under the Revised
Corporation Code.

XIX

Senator Bongga was accused of plunder before the Sandiganbayan. In

connection with the investigation being conducted on Senator Bongga, the
Ombudsman issued a subpoena to ABC Bank B, asking it to bring the bank
account records of Senator Bongga’s driver, Harry.

Harry appeared before the Sandiganbayan, invoking the right to secrecy of

his bank account.
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Discuss the Bank Secrecy Laws and state whether the account of Harry is
entitled to be accorded secrecy or falls under the exemptions of the law. (5
points)

SUGGESTED ANSWER:

Under RA No. 1405, as amended, or the Bank Secrecy Law, all deposits of
whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government are considered
as of an absolutely confidential nature and may not be examined, inquired
or looked into by any person, government official, bureau or office.

The exceptions to this are: a) upon written permission of the depositor, or

b) in cases of impeachment, or c) upon order of a competent court in cases
of bribery or dereliction of duty of public officials, or d) in cases where
the money deposited or invested is the subject matter of the litigation.

In Ejercito v Sandiganbayan (G.R. Nos. 157294-95, 2006), it was held that

the crime of plunder is analogous to bribery and, therefore, the exception
from the secrecy of bank deposits granted in cases of bribery has been
applied to cases for plunder under RA 7080.

However, the order here came from the Ombudsman and not an order of
a competent court in a plunder case. The investigation by the Ombudsman
is not one of the exceptional cases when the law allows the examination
of the bank records and documents. In Marquez v. Desierto (G.R.
No.135882, 2001) the SC ruled that before an in camera inspection could be

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 allowed, there must be a pending case before a court of competent
jurisdiction and subject to the following additional requirements:
1. The account must be clearly identified;
2. The inspection limited to the subject matter of the pending case
before the court of competent jurisdiction;
3. The bank personnel and the account holder must be notified to be
present during the inspection; and

Such inspection may cover only the account identified in the pending case.

In sum, Harry is entitled to be accorded secrecy under the law.

XX

ParentCo, Inc. owns 100% (including one qualifying share of each Director)
of the outstanding shares of SubCo Corp. The two (2) companies entered
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into a contract whereby ParentCo would provide legal and accounting

services to SubCo for a fee. Of the five (5) Directors of SubCo, one is also a
Director of ParentCo. The contract was taken up in a meeting of the Board
of Directors of SubCo where only three (3) Directors, including the
interlocking Director, were present. Two (2) Directors, again including the
interlocking Director, voted affirmatively; one (1) Director abstained.
(a) Is the contract valid? (2.5 points)
(b) Do you count the interlocking Director towards quorum and vote? (5
points)

SUGGESTED ANSWER:
a. Yes, the contract is valid. The contract is a related-party transaction
because it is between a parent company and its subsidiary. It is also a
contract between corporations with an interlocking Director. Under the
Revised Corporation Code, a contract between two (2) corporations
with interlocking Directors shall not be invalidated on that ground
alone, except in cases of fraud, and provided the contract is fair and
reasonable under the circumstances.

b. Yes, the interlocking Director is counted towards quorum and vote.

The special rules in Sections 31 and 32 of the Revised Corporation Code
do NOT apply. What those provisions contemplate is a situation where
the interlocking Director is in a conflict-of-interest, specifically where
he has substantial interest (more than 20%) in one corporation but only
a nominal interest in the other corporation.

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 In the present problem, ParentCo owns 100% of SubCo, including the
qualifying share of the interlocking Director. In other words, the
interlocking Director is neither a substantial nor nominal owner of
SubCo. Since Sections 31 and 32 do not apply, the general rules on
quorum and vote apply. In a 5-person Board of Directors, quorum is 3
which is present in the problem. The required vote to approve a
corporate action is majority of the Directors present, or 2 in the
problem, which is also satisfied.
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