COLLEGE OF MAASIN COLLEGE OF LAW MIDTERM EXAMINATION CORPORATION LAW

I
The stockholders of People Power, Inc. (PPI) approved the following two resolutions
in a special stockholder's meeting:

1. Increasing the capital stock of PPI

2. Authorizing the board to issue for cash payment the new shares from the
proposed capital stock increase in favor of outside investors who are non-
stockholders

The foregoing resolutions were approved by stockholders representing 99% of the

total outstanding capital stock. The sole dissenter was John Estrada who owned the
rest of the 1% of the stock.

a Are the resolutions binding on the corporation and the stockholders, including
Estrada, the dissenting stockholder?

b. What remedies, if any, are available to Estrada?

Answer: a)The board resolutions (i) increasing the authorized capital stock of PPI,
and (ii) authorizing the Board to issue new shares from that increase of capital stock
in favor of outside investors is binding on the stockholders since the said resolutions
were approved by the stockholders representing at least 2/3 of the total outstanding
capital stock.
b)Estrada, the dissenting stockholder, may avail himself of the appraisal rights by
claiming that since the resolutions appear to favor outside investors, as against
incumbent stockholders, on the increase in capital stock, he may demand the
payment of the appraised value of his shares. (BAR 1987)
II
In a special meeting called for the purpose, 2/3 of the stockholders representing the
outstanding capital stock in X Co. authorized the company’s Board of Directors to
amend its by-laws. By majority vote, the Board then approved the amendment. Is
this amendment valid?
  No, since the stockholders cannot delegate their right toamend the By-Laws
to the Board.
III

In 2016, X Corp obtained a loan worth P50,000,000 from J Bank which was secured
by a third-party mortgage executed by Y, Inc. in favor of X Corp. Since X Corp was
not able to settle its loan obligation to J Bank when it fell due and despite numerous
demands, Bank foreclosed the mortgaged properties. The properties were sold in
foreclosure sale for P35,000,000 thereby leaving a P15,000,000 deficiency. For
failure of X Corp. to pay the said deficiency, J Bank filed a complaint for sum of
money against X Corp., its President, Mr. P and Y. Inc.

With respect to Mr. P, J Bank argued that h should be solidarily liable together with X
Corp. because he signed the loan document on behalf of X Corp in his capacity as
President. On the other hand, J Bank contented that Y, Inc. should also be held
solidarily liability because the shareholdings of both corporations are identically
owned and their operations are controlled by the same people, hence, Y, Inc. is a
mere alter ego of X Corp.

a. Should Y Inc. be held liable? Explain.

b. Should Mr. P be held liable? Explain
 Should Mr. P be held liable? Explain. (2.5%)
No, Mr. P should not be held liable because of the Doctrine of Separate Juridical
Entity. The obligations of the corporation are not the obligations of its stockholders,
unless there is reason to pierce the veil of corporate fiction. Since there is no cause
to pierce the corporate veil in the above problem, Mr. P should not be held liable.
 Should Y, Inc. be held liable? Explain. (2.5%)
No, Y, Inc. should not be held liable. Jurisprudence provides that mere majority or
complete stock control is not sufficient basis to pierce the veil of corporate fiction.
The alleged alter ego must have no separate mind, will or existence of its own at
the time the transaction.
Caveat: It would be best if your answer will be based on the elements below. The
Supreme Court has applied what is known as the Control Test or the
Instrumentality/Alter Ego Doctrine. The test in determining applicability of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect
 to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
 Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiff’s legal rights; and
 The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents ‘piercing the corporate veil. In
applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation.
IV
Under the by-laws of Corporation A, its Board of Trustees (Board) is composed of 5
members, two of whom are nominated and appointed by the 3 original members.
Further under section 2, article 1 of the Bylaws, only a majority of the 3 original
members of the board shall be necessary at all meetings to constitute a quorum. Is
Section 2, Article 1 of the By-laws of Corporation A consistent with existing
corporation laws?
 Section 2, Article 1 of the by-laws of Corporation A may not be fully
consistent with existing Philippine corporation laws. While the composition of
the board with five members is compliant, the stipulation that only a majority
of the three original members constitutes a quorum could lead to situations
where decisions are made without adequate representation from the entire
board. The Revised Corporation Code generally implies that quorum
requirements should reflect the total number of board members. Therefore, it
would be advisable to amend this provision to ensure that decisions are made
with a majority of the full board, aligning with legal standards and promoting
better governance.
V

The general membership meeting of Company A was postponed by the Board. The
new notice of the said meeting, as reset, prescribed two entirely new requirements
of proxies, to wit:

a. The proxy must be under oath

b. For corporate members, a board resolution authorizing the signatory to the proxy
should be submitted.
Are the two new requirements valid?

VI

Give at least three forms of corporate combinations and acquisitions.

VII

AA, a minority stockholder, filed a suit against BB, CC, DD and EE; the holders of
majority shares of MOP Corporation for alleged misappropriation of corporate funds.
The complaint averred that MOP Corporation is the corporation in whose behalf and
for whose benefit the derivative suit has been brought. In their capacity as
members of the BOD, the majority stockholders adopted a resolution authorizing
MOP Corporation to withdraw the suit. Pursuant to such, the corporate counsel filed
a motion to dismiss in the name of MOP Corporation.

Should the motion be granted or denied? Explain.

No. All the requisites for a valid derivative suit exist in this case. First, AA was
exempt fromexhausting his remedies within the corporation, and did not have to
make a demand on the Boardof Directors for the latter to sue. Here, such a demand
would be futile, since the directors whocomprise the majority (namely, BB, CC, DD
and EE) are the ones guilty of the wrongcomplained of. Second, AA appears to be
stockholder at the time the alleged misappropriation of corporate funds. Third, the
suit is brought on behalf and for the benefit of MOP Corporation. Inthis connection, it
was held in Conmart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991) that to grant tothe
corporation concerned the right of withdrawing or dismissing the suit, at the
instance of themajority stockholders and directors who themselves are the persons
alleged to have committedthe breach of trust against the interest of the corporation
would be to emasculate the right ofminority stockholders to seek redress for the
corporation. Filing such action as a derivative suiteven by a lone stockholder is one
of the protections extended by law to minority stockholdersagainst abuses of the
majority
VIII
A and B are good friends and have both businesses of their own which they both
registered as single proprietorship. They wanted to invest in a corporation but then
they were discouraged to know that minority stockholders of a corporation may be
denied the right to actively participate in the management of the corporation. Is this
contention correct?

IX
Yeh was the controlling stockholder of YTC at the time the promissory note was
issued. As security for the payment of the promissory note, Yeh issued and delivered
to Ysa a postdated personal check covering the face value of the PN drawn from his
account with Yellow Bell Bank and Trust Company. The proceeds of the loan under
the PN were used by YTC as part of its working capital. A year later, Ysa inserted the
date of "November 23, 2017" on the date section of the PN and made a formal
demand upon YTC, through Yeh, to pay the note, but which was refused on the
ground that Yeh was no longer the President and the controlling
shareholder of YTC. By this time, all the shares of YTC had already been sold to a
new group of investors. Ysa deposited the personal check issued by Yeh which was
dishonored. He then filed a collection suit against YTC and Yeh including the accrued
interest. In the collection suit, YTC, now owned by new owners, raised the defense
that it cannot be held liable on the PN since such was entered into by its former
owner and President and which act the new BOD did not rafity. Rule on the merits of
the defense.
(a) A PN issued with a blank date is one that is not payable on demand or on a
fixed or determinable future time, and therefore the insertion of the date
constituted material alteration that nullified it, so that no cause of action arose.
SUGGESTED ANSWER:
 The defense is not meritororious. Where the instrument is not dated, it will be
considered to be dated as of the time it was issued (Section 17 of NIL
(c)). Section 14 of NIL also concedes to the payee the prima facie authority
to fill-in the blanks in a negotiable instrument. Such prima facie stands in the
absence of evidence to the contrary.
 Yektas cannot be made liable on the PN since he signed in his capacity as
President of YTC, which fact was known to Ysmael although not indicated on
the PN.
SUGGESTED ANSWER:
(b) The defense is not meritorious. Where the instrument contains, or a person
adds to his signature words indicating that he signs for or on behalf of a principal or
in a representative capacity, he must disclose his principal and must indicate that
he is acting on benalf of his principal (Section 20 of NIL).
 Yektas signed the PN merely as an accommodation to YTC. As he received no
consideration for the PN, it is void for lack of consideration.
SUGGESTED ANSWER:
  The defense is not meritorius. An accommodation party signs a negotiable
instrument as a maker, drawer, endorser, acceptor without receiving value
therefor and only for the purpose of lending his name in another, he is liable
to a holder for value notwithstanding that such holder, at the time of taking
the instrument, knew him only to be an accommodation party (Section 29
of NIL).
 YTC, now owned by new owners, cannot be held liable on the PN since it was
entered into by its former owner and President, which act the new Board of
Directors did not ratify.
SUGGESTED ANSWER:
 The defense is not meritorius. In stock sales, where shareholder sell a block
of stock to new or existing shareholders, the transaction takes place at the
shareholder level only. Because the corporation has a legal personality
separate and distinct from that of its shareholders, a change in the
composition of shareholders will not affect its existence or extinguish its
separate legal personality (SME Bank v. Samson, (G.R. No. 186641, October
8, 2013)).
 The PN is void for being in violation of the Usury Law seeking interest at an
unconscionable rate of 120% p.a.
SUGGESTED ANSWER:
(e) The defense is not meritorius. The Usury law is currently suspended in view of
CB Circular 905 series of 1982, which lifted the ceiling on interest rate for loans. If
the interest rate is deemed to be unconscionable by the courtdespite the absence
of the Usury Law, the legal rate of interest shall be deemed to apply; thus, the PN
remains valid.

What is the business judgment rule?

 Under this principle, the stockholders cannot review the decisions of the
Board. If they do not want the decision of the Board, they cannot go to court
and change the decision.
XI

Yangchow, Inc.'s Articles of Incorporation provides for two types of shares of stocks:
common and preferred shares. The articles also provides that the prefered shares
shall have a guaranteed annual dividend of 3% of the par value". Its by-laws also
specifically provides that "preferred shareholdings shall be cumulative and
participating." No other terms of preference are provided for preferred shares in
either the Articles or By-laws.

For the first five years of its operations, the company as operating at a loss. At the
end of the 6th year, the company realized a net profit of P100million and
unrestricted retained earnings of P30million. The Board of Directors declared and
paid out dividends at 1% on common shares, 5% on preferred shares, which
amounted to P30million. However, the preferred shares made a formal demand that
they be given an additional 3% dividend for each of the five years based on the
preferred shares features of "cumulative and participating" and an additional 1%
given to the common shareholders, which could all be accommodated within the
remaining balance of the net profit.

Should the company's board heed the demand of its preferred shareholders?
 YI’s Board should not heed the demand of its preferred shareholders. While
the preferred shares are cumulative and participating, the holders thereof are
entitled to dividends only if the unrestricted retained earnings are sufficient
to pay such dividends. Dividends are declared based on unrestricted retained
earnings and not on the amount of net profit Republic Planters Bank
XII

Triple R Corporation (Triple R) was incorporated in 1960 with 500 founder's share
and 78 common shares as its initial capital stock subscription. However, Triple R
registered its stock and transfer books only 178 and recorded merely 33 common
shares as the corporation's issued and outstanding shares.

In 1982, Juancho, the sole heir of one of the original incorporators filed a petition
with the SEC for the registration of his property rights over 120 founder's shares and
12 common shares. The petition was supported by a copy of the Articles of
Incorporation indicating the incorporator's initial capital stock subscription. Will the
petition be granted? Why or why not?
XIII
ABC Corporation wants to obtain a loan from a bank in an amount equivalent to
25% of the bank's net worth. Whose approval is needed to authorize the
transaction?

XIV
Supposing that the corporation wants to obtain from the public through the issuance
of bond, is stockholders approval required in addition to board approval?

XV

X Corporation shortened its corporate life by amending its articles of incorporation.

IT has no debts but own a prime property in Quezon City. How would the said
property be liquidated among the five stockholders of the corporation?
 The prime property of X Corporation can be liquidated among the five
stockholders after theproperty has been conveyed by the corporation to the
five stockholders, by dividing orpartitioning it among themselves in any two
of the following ways:
 1) by PHYSICAL DIVISION orPARTITION based on the proportion of the values
of their stockholdings; or
 2) SELLING THE PROPERTY to a third person and dividing the proceeds among
the fivestockholders in proportion to their stockholdings; or
 3) after the determination of the value of the property, by ASSIGNING or
TRANSFERRING THEPROPERTY to one stockholder with the obligation on the
part of said stockholder to pay theother four stockholders the amount/s in
proportion to the value of the stockholding of each
XVI

Barn filed an action to enjoin SN Company's BOD from selling a parcel of land
registered in the corporation's name to compel the corporation to recognize Barn as
a stockholder with 50 shares, to allow him to inspect the corporate books and to
claim damages against the corporation and its officers. Subsequently, the
corporation and the individual defendants moved to dismiss the complaint since the
corporation's certificate of registration was revoked by the SEC during the pendency
of Barn's case on the ground of non-compliance with reportorial requirements. THE
special commercial court granted the motion and reasoned that only action for
liquidation of assets can be maintained when a corporation has been dissolved and
Barn cannot seek relief which in effect lead to the continuation of the corporation's
business. The court also ruled that it lost jurisdiction over the intra-corporation
controversy upon the dissolution of the corporation. Was the court correct?
(A) The court is not correct. An action to be recognized as a stockholderand to
inspect corporate documents, is an intra-corporate dispute which does not
constitute a continuation of business. The dissolution of the corporation simply
prohibits it from continuing its business. Moreover, under Section 145 of the
Corporation Code, no right or remedy in favor of or against any corporation, its
stockholders, members, directors and officers shall be removed or impaired by the
subsequent dissolution of the corporation. The dissolution does not automatically
convert the parties into strangers or change their intra corporate relationship.
Neither does it terminate existing causes of action which arose because of the
corporate ties of the parties. The cause of action involving an intra-corporate
controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation