Mercantile Law Q and A 2009

Bar Exam 2009

I.
Atlantis Realty Corporation (ARC), a local firm engaged in real estate development, plans to sell one of
its prime assets --- a three-hectare land valued at about P100-million. For this purpose, the board of
directors of ARC unanimously passed a resolution approving the sale of the property for P75-million to
Shangrila Real Estate Ventures (SREV), a rival realty firm. The resolution also called for a special
stockholders meeting at which the proposed sale would be up for ratification.

Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop the sale. He then
commences a derivative suit for and in behalf of the corporation, to enjoin the board of directors and
the stockholders from approving the sale.

Can Atty. Edric, who owns only one (1) share in the company, initiate a derivative suit? Why or why not?
(2%)

Answer:

Yes, Atty. Edric can initiate a derivative suit on behalf of the corporation to enforce its corporate right or
cause of action to stop the sale of the property for a price which is clearly disadvantageous to the
corporation. Derivative suit is a remedy available to the stockholder to assail and nullify the wrongful
acts committed by the very directors and officers entrusted with the management of the corporation
and therefore, not expected to rectify their wrongful acts even though the same are prejudicial to the
corporation. The suing stockholder will then take the cudgels for the corporation to protect its interest.

If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why and where would
such a suit be filed? If not, why not? (2%)

Answer:

Yes, such suit would constitute an intra-corporate dispute under the Supreme Court-issued Interim
Rules of Procedure for Intra-Corporate Controversy (Rule l, Section 1 (4). Independently of said rules,
derivative suit is in the nature of intracorporate controversy because it is a suit initiated by a stockholder
against other stockholders who are officers and directors of the same corporation and pertains to the
enforcement of their rights and obligations under the Corporation Code. Such suit should be filed in the
RTC of the city where the principal office of the corporation is located (Section 5 of the Interim Rules)
Will the suit prosper? Why or why not? (3%)

Answer:

- The Supreme Court held that an intracorporate dispute is dismissible unless the following are
alleged in the complaint: a) the stockholder is suing on behalf of the corporation to enforce a
corporate right or cause of action; b) plaintiff must be a stockholder at the time the cause of
action accrued and at the time the cause of action accrued and at the time of filing unless the
cause of action is continuing in nature in which case it is enough that he is a plaintiff at the time
of filing; c) exhaustion of intra-corporate remedies to obtain the relief he desires under the
corporation’s articles of incorporation and by-laws; d) no appraisal right is available and e)
complaint is not a nuisance or harassment suit. Here, the first two elements are alleged but the
rest were not.

II.

Antarctica Life Assurance Corporation (ALAC) publicly offered a specially designed insurance policy
covering persons between the ages of 50 to 75 who may be afflicted with serious and debilitating
illnesses. Quirico applied for insurance coverage, stating that he was already 80 years old. Nonetheless,
ALAC approved his application.

Quirico then requested ALAC for the issuance of a cover note while he was trying to raise funds to pay
the insurance premium. ALAC granted the request. Ten days after he received the cover note, Quirico
had a heart seizure and had to be hospitalized. He then filed a claim on the policy.

Can ALAC validly deny the claim on the ground that the insurance coverage, as publicly offered, was
available only to persons 50 to 75 years of age? Why or why not? (2%)

No. By approving the application of Quirico who disclosed that he was already 80 years old, ALAC has
waived its age requirement. Hence, ALAC is now precluded from raising such defense of age of the
insured.

Did ALAC’s issuance of a cover note result in the perfection of an insurance contract between Quirico
and ALAC? Explain. (3%)

Yes. The issuance of a cover note resulted in the perfection of the contract of insurance. Cover notes are
issued to bind the insurer temporarily pending issuance of the policy (Section 52 of the Insurance Code,
as amended). They are valid for a period of sixty days. No separate premium is to be paid on a cover
note. Within sixty days after issuance of the cover note, a policy shall be issued in lieu thereof, including
within its terms the identical insurance bond under the cover note and the premiums therefor.

III.
Maharlikang Pilipino Banking Corporation (MPBC) operates several branches of Maharlikang Pilipino
Rural Bank in Eastern Visayas. Almost all the branch managers are close relatives of the members of the
Board of Directors of the corporation. Many undeserving relatives of the branch managers were granted
loans. In time, the branches could not settle their obligations to depositors and creditors.

Receiving reports of these irregularities, the Supervising and Examining Department (SED) of the
Monetary Board prepared a detailed report (SED Report) specifying the facts and the chronology of
events relative to the problems that beset MPBC rural bank branches. The report concluded that the
bank branches were unable to pay their liabilities as they fell due, and could not possibly continue in
business without incurring substantial losses to its depositors and creditors.

May the Monetary Board order the closure of the MPBC rural banks relying only on the SED Report,
without need of an examination? Explain. (3%)

Yes. Under Republic Act No. 7653, otherwise known as the New Central Bank Act, prior notice and
hearing are no longer required and a report made by the head of the SED suffices for a bank to be
closed. The purpose of the law is to make the closure of the bank summary and expeditious for the
protection of the public interest (Rural Bank of San Miguel vs. Monetary Board, G.R. No.150886,
February 16,2007)

If MPBC hires you as lawyer because the Monetary Board has forbidden it from carrying on its business
due to its imminent insolvency, what action will you institute to question the Monetary Board’s order?
Explain. (3%)

The order of the Monetary Board may be questioned through a petition for certiorari with the Court of
Appeals on the ground that the action was arbitrary and made in bad faith tantamount to grave abuse of
discretion amounting to lack or excess of jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing at least majority of the outstanding capital stock within 10 days
from receipt by the board of directors of the MPBC of the order directing the closure of the bank or the
appointment of a conservator or receiver. (Central Bank of the Philippines vs. Court of Appeals, 208
SCRA 652)

IV.
When is there an ultra vires act on the part of [a] the corporation; [b] the board of directors; and [c] the
corporate officers. (3%)

Answer:

a. Under Section 45 of the Corporation Code (“Code”), no corporation shall possess or exercise any
corporate power except those conferred by the Code or by its articles of Incorporation and
except such as are necessary or incidental to the exercise of the powers so conferred. When the
corporation does an act or engages in an activity which is outside of its express, implied or
incidental powers set out in the Code and its articles of incorporation, the act is deemed to be
ultra vires.
 b. The Board commits an ultra vires act when it engages in an activity without the ratificatory or
affirmative vote of the stockholders in those instances where the Corporation Code so requires
such vote or in cases powers are reserved solely to the stockholders.

c. When a corporate officer enters into a contract on behalf of the corporation without having
been so expressly or impliedly authorized by the laws of the Corporation or by the board of
Directors, even when the act or contract falls within the corporation’s express, implied or
incidental power, then the unauthorized act of the corporate officer is deemed to be ultra vires.

V.
Triple A Corporation (Triple A) was incorporated in 1960, with 500 founders’ shares and 78 common
shares as its initial capital stock subscription. However, Triple A registered its stock and transfer book
only in 1978, and recorded merely 33 common shares as the corporation’s issued and outstanding
shares.

On May 6, 1992, a special stockholders’ meeting was held. At this meeting, what would have constituted
a quorum? Explain. (3%)

A quorum consists of the majority of the voting shares of the corporation. Thus, the quorum for such
meeting would be 289 shares or a majority of the 578 shares issued and outstanding as indicated in _
the articles of incorporation. This includes the 33 common shares reflected in the stocks and transfer
book, there being no mention or showing of any transaction effected from the time of Triple A’s
incorporation in 1960 up to the said meeting.

What is a stock and transfer book? (1%)

A stock-and-transfer book is a book which records all stocks in the name of the stockholders
alphabetically arranged; the installments paid or unpaid on all stocks; a statement of every alienation,
sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as
the by-laws may prescribe. (Section 74 of the Corporation Code)
 VI.
One of the passenger buses owned by Continental Transit Corporation (CTC), plying its usual route,
figured in a collision with another bus owned by Universal Transport, Inc. (UTI). Among those injured
inside the CTC bus were: Romeo, a stowaway; Samuel, a pickpocket then in the act of robbing his
seatmate when the collision occurred; Teresita, the bus driver’s mistress who usually accompanied the
driver on his trips for free; and Uriel, holder of a free riding pass he won in a raffle held by CTC.

Will a suit for breach of contract of carriage filed by Romeo, Samuel, Teresita, and Uriel against CTC
prosper? Explain. (3%)

Romeo cannot sue for breach of contract of carriage for the simple reason that there was no valid
contract of carriage between a stowaway, who secures passage through fraud.

Samuel and Teresita cannot sue for breach of contract of carriage. They were never accepted by the
carrier as passengers. Samuel did not board the bus to be transported but to commit robbery. Teresita
did not board the bus to be transported but to accompany the driver while he was performing his work.

Uriel can sue for breach of contract of carriage. He was a passenger although he was being transported
gratuitously (Article 1758 of the Civil Code)

What, if any, are the valid defenses that CTC and UTI can raise in the respective actions against them?
Explain. (3%)

With respect to Romeo, Samuel and Teresita, since there was no pre-existing contractual relationship
between them and CTC, CTC can raise the defense that it exercised the due diligence of a good father of
a family in the selection and supervision of its driver.

It can raise the same defense against Uriel if there is a stipulation that exempts it from liability for simple
negligence, but not for willful acts or gross negligence (Article 1758 of the Civil Code)

CTC can also raise against all the plaintiffs the defense that the collision was due exclusively to the
negligence of the driver of UTI which constitutes a fortuitous event, because it was unforeseen and
there was no concurrent or contributory negligence on the part of its own driver.

TC can also raise against Samuel the defense that he was engaged in an illegal act at the time of the
collision, for which he can be held liable for | damages based on quasi-delict.

Since UTI had no pre-existing contractual relationship with any of the plaintiffs, it can raise the defense
that it exercised due diligence in the selection and supervision of its driver, that the collision was due to
force majeure, and that Samuel was committing an illegal act at the time of the collision .