Midterm Exam coverage for Corporation Law is Section 1-58 of the RCCP.

Study the following review questions.

1. Explain the Trust Fund Doctrine.

2. One of the distinctive features of a corporation is the right of succession that is

also known as “perpetual succession”. Explain the concept of perpetual succession
as a feature of a corporation.

3. X is a Filipino immigrant residing in Sacramento, California. Y is a Filipino residing

Quezon City. Z is a resident alien residing in Makati City. GGG Corporation is a
domestic corporation—40% owned by foreigners and 60% owned by Filipinos,
with T as authorized representative. CCC Corporation is a foreign corporation
registered with the Philippines SEC, KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years of age, and daughter of Y.
a. Who can be incorporators?
b. Who can be subscribers?
c. What are the differences between an incorporator and a subscriber, if there
are any?

4. Guetze and his wife have 3 children: Neymar, 25, who is now based in Rio de
Janeiro, Brazil; Muelter, 23, who has migrated to Munich, Germany; and James,
21, who resides in Bogota, Colombia. Neymar and Muelter have since renounced
their Philippine citizenship in favor of their country of residence. Nearing 70 years
old, Guetze decided to incorporate his business in Binondo, Manila. He asked his
wife and 3 children to act as incorporators with 1 share of stock each, while he
owned 999,996 shares of the 1,000,000 shares of the capital stock. Assuming all
other requirements are met, should the SEC accept or reject the Articles of
Incorporation? Reason.

5. C Steel and Nail Co., owned by X, had financial obligations to its employees. C
ceased operation, and was immediately succeeded on the next day by, and all its
assets were turned over to, the E Steel Corporation, 90% of the subscribed shares

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 of which were also owned by X. May the E Steel Corporation be held liable for the
financial obligation of the C Steel and Nail Co. Inc. to its employees? Reasons.

6. R Realty Corporation, lessor, obtained a favorable judgment in a suit against GEE,

lessee, for the latter’s failure to pay rentals. The judgment however was not
executed because of the trial court’s finding that P2 million was paid by GEE to R
Realty Corporation tantamount to full satisfaction of the judgment debt. It turned
out however that P1 million was the consideration in the pacto de retro sale (sale
with right to repurchase) drawn in favor of R Realty’s officers/stockholders, JR and
MR. Furthermore, the other P1 million paid turned out as payment for a loan
extended by JR and MR in favor of GEE. Can the payments to R Realty’s
officers/stockholders be considered payment to the corporation?

7. Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawsuit, which
could subject him to substantial damages. A year before the court rendered
judgment, Mr. Pablo sought his lawyer’s advise on how to plan his estate to avoid
taxes. His lawyer suggested that he should form a corporation, with himself, his
wife and his children (all students and unemployed) as stockholders, and then,
transfer all his assets and liabilities to this corporation. Mr. Pablo followed the
recommendation of his lawyer. One year later, the court rendered judgment
against Mr. Pablo and the plaintiff sought to enforce judgment, The sheriff,
however, could not locate any property in the name of Mr. Pablo and therefore
returned the write of execution unsatisfied. What remedy, if any, is available to
the plaintiff? Explain.

8. 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 the amendment valid? Explain.

9. X Corp. operates a call center that received orders for pizzas on behalf of Y Corp.
which operates a chain of pizza restaurants. The two companies have the same
set of corporate officers. After 2 years, X Corp. dismissed its call center agents for
no apparent reason. The agents filed a collective suit for illegal dismissal against
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 both X Corp. and Y Corp. based on the doctrine of piercing the veil of corporate
fiction. The latter set up a defense that the agents are in the employ of X Corp.
which is a separate juridical entity. Is the defense tenable?
a. No, since the doctrine would apply, the two companies having the same set of
corporate officers.
b. No, the real employer is Y Corp., the pizza company, with X Corp. serving as an
arm for receiving its outside orders for pizzas.
c. Yes, it is not shown that one company completely dominates the finances,
policies, and business practices of the latter.
d. Yes, since the two companies perform two distinct businesses.

10. In an action for collection of a sum of money, the RTC of Makati City issued a
decision finding D-Securities, Inc. liable to Rehouse Corporation for P10 M.
Subsequently, the writ of execution was issued but returned unsatisfied because
D-Securities had no more assets to satisfy the judgment. Rehouse moved for an
Alias Writ of Execution against Fairfield Bank (FB), the parent company of D-
Securities. FB opposed the motion on the grounds that it is a separate entity and
that it was never made party to the case. The RTC granted the motion and issued
the Alias Writ of Execution. In its Resolution, the RTC relied on the following facts:
499,995 out of the 500,000 outstanding shares of stocks of D-Securities are
owned by FB; FB had actual knowledge of the subject matter of litigation as the
lawyers who represented D-Securities are also the lawyers of FB. As an alter ego,
there is no need for a finding of fraud or illegality before the doctrine of piercing
the veil of corporate fiction can be applied. The RTC ratiocinated that being one
and the same entity in the eyes of the law, the service of summons upon D-
Securities has bestowed jurisdiction over both the parent and wholly-owned
subsidiary. Is the RTC correct?

11. In 2016, X Corp. obtained a loan worth ₱50,000,000.00 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, J Bank foreclosed the mortgaged properties. The
properties were sold in a foreclosure sale for ₱35,000,000.00, thereby leaving a
₱15,000,000.00 deficiency. For failure of X Corp. to pay said deficiency, J Bank

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 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 he should be held 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 contended that Y, Inc.
should also be held solidarily liable 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 Mr. P be held liable? Explain.
B. Should Y, Inc. be held liable? Explain.

12. In June 2018, DEF Corp. sent notices to its stockholders informing them of the
corporation’s issuance of new shares of stock. The notice included a reminder
that, pursuant to DEF Corp.’ s Articles of Incorporation, any stockholder who fails
to exercise his or her pre-emptive right within three (3) weeks from receipt of
notice would be considered to have waived the same.
Ms. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive right within
the said period. However, she claimed that she did not validly waive her right to
do so because a waiver must be expressed in writing.
a) Explain the concept of pre-emptive right under the Corporation Code.
b) Is Ms. Z’s contention correct? Explain.

13. Yenetic Corporation wants to increase its Authorized Capital Stock (which is
currently fully subscribed and issued) to be able to increase its working capital to
undertake business expansions.

The Board of Directors consults with you as legal counsel on the proper answers
to the following issues:

(a) Can Yenetic's AOI be formally amended to remove the right of appraisal on all
dissenting stockholders in all matters under the law which requires a ratification
vote of the stockholders?
(b) If the increase in Authorized Capital Stock is formally submitted to the
stockholders in a meeting duly called for the purpose, what is the vote necessary
for the stockholders' ratification, and may the dissenting stockholders exercise
their appraisal right?

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 (c) Once the increase in the Authorized Capital Stock of Yenetic has been legally
effected with the SEC, can the new shares from the unissued shares be offered to
a new limited group of investors without having to offer them to the
shareholders of record since no pre-emptive right is provided for in the AOI and
By-laws of Yenetic?

14. Under the Nell Doctrine, so called because it was first pronounced by the
Supreme Court in the 1965 ruling in Nell v. Pacific Farms, Inc.  (15 SCRA 415), the
general rule is that where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and liabilities of
the transferor.
State the exceptions to the Nell Doctrine.

15. X Corporation is engaged in the business of milling rice. Around 60% of its assets
consist of cash in the bank, 30% rice milling machine and the remaining consist
of office equipment and supplies. X Corporation sold its machine. Can it be
considered sale of substantially all of the assets of the corporation?

16. Henry is a board director in XYZ Corporation. For being the "fiscalizer" in the
Board, the majority of the board directors want him removed and his shares sold
at auction, so he can no longer participate even in the stockholders' meetings.
Henry approaches you for advice on whether he can be removed as board
director and stockholder even without cause. What is your advice? Explain
"amotion" and the procedure in removing a director.

17. A corporation organized under the Corporation Code commences to have

corporate existence and juridical personality and is deemed incorporated:
a) from the date the application for incorporation is filed with the Securities and
Exchange Commission (SEC)
b) from the date the SEC issues a certificate of incorporation under its official
seal
c) thirty (30) days after the date the application for incorporation is filed with the
SEC
d) thirty (30) days after the datethe SEC issues a certificate of incorporation
under its official seal.

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18. Pursuant to its By-Laws, Soei Corporation’s Board of Directors created an
Executive Committee to manage the affairs of the corporation in between board
meetings. The Board of Directors appointed the following members of the
Executive Committee: the President, Sarah L; the Vice President, Jane L; and, a
third member from the board, Juan Riles.
On December 1, 2013, the Executive Committee, with Sarah L and Jane L present,
met and decided on the following matters:
1. Purchase of a delivery van for use in the corporation’s retail business;
2. Declaration and approval of the 13th month bonus;
3. Purchase of an office condominium unit at the Fort; and
4. Declaration of P10.00 per share cash dividend.
Are the actions of the Executive Committee valid?

19. In the November 2010 stockholders meeting of Greenville Corporation, eight (8)
directors were elected to the board. The directors assumed their posts in January
20 ll. Since no stockholders' meeting was held in November 2011, the eight
directors served in a holdover capacity and thus continued discharging their
powers. In June 2012, two (2) of Greenville Corporation's directors- Director A
and Director B -resigned from the board. Relying on Section 29 of the
Corporation Code, the remaining six (6) directors elected two (2) new directors to
fill in the vacancy caused by the resignation of Directors A and B.
Stockholder X questioned the election of the new directors, initially, through a
letter-complaint addressed to the board, and later (when his letter-complaint
went unheeded), through a derivative suit filed with the court. He claimed that
the vacancy in the board should be filled up by the vote of the stockholders of
Greenville Corporation. Greenville Corporation's directors defended the legality
of their action, claiming as well that Stockholder X's derivative suit was improper.
Rule on the issues raised.

20. Unknown to the other four proponents, Enrico (who had been given the task of
attending to the Articles of Incorporation of the proposed corporation, Auto
Mo,Ayos Ko) misappropriated the filing fees and never filed the Articles of
Incorporation with the Securities and Exchange Commission (SEC). Instead, he
prepared and presented to the proposed incorporators a falsified SEC certificate
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 approving the Articles. Relying on the falsified SEC certificate, the latter began
assuming and discharging corporate powers.
Auto Mo, Ayos Ko is a __________.

(A) de jure corporation

(B) de facto corporation
(C) corporation by estoppel
(D) general partnership
(E) None of the above.

21. The term of the directors of X Corporation expired on June 1, 2009. However, the
annual meeting of stockholders was postponed, hence, the directors continued to
perform their functions in a hold-over capacity. Before the new scheduled date of
the meeting of the stockholders, one of the hold-over directors, Mr. A, resigned.
Can the remaining directors, who still constitute quorum, appoint a replacement
for Mr. A? Explain briefly.

22. In a corporation where there are 5 directors, 1 director was removed without
good cause. The removed director did not represent the minority stockholders.
a. Is the removal of the director proper? Why or why not?
b. Who shall fill the vacancy created by the removed director?

23. As a result of perennial business losses, a corporation’s net worth has been wiped
out. In fact, it is now in a negative territory. Nonetheless, the stockholders did not
like to give up. Creditor-banks, however, do not share the confidence of the
stockholders and refuse to grant more loans. (1) What tools are available to the
stockholders to replenish capital? (2) Assuming that the corporation continues to
operate even with depleted capital, would the stockholders or managers be
solidarily liable for the obligations incurred by the corporation? Explain.

24. Pedro owns 70% of the subscribed capital stock of a company which owns an
office building. Paolo and Juan own the remaining stock equally between them.
Paolo also own a security agency, a janitorial company, and a catering business.
In behalf of the office building company, Paolo engaged his companies to render
their services to the office building. Are the service contracts valid? Explain.

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25. Chito Santos is a director of both Platinum Corporation (PLATINUM) and Kwik
Silver Corporation (KWIK). He owns 1% of the outstanding capital stock of
PLATINUM and 40% of KWIK. PLATINUM plans to enter into a contract with KWIK
that will make both companies earn very substantial profits. The contract is
presented at the respective board meetings of PLATINUM and KWIK. (page 413)
a) In order that the contract will not be voidable, what conditions will
have to be complied with? Explain.
b) If these conditions are not met, how many this contract be ratified?

26. Explain the Doctrine of Corporate Opportunity

27. Suppose that the by-laws of “X” Corporation, a mining firm, provides that “The
directors shall be relieved from all liability for any contract entered into by the
corporation with any firm in which the directors may be interested.” Thus, director
“A” acquired claims which overlapped with “X’s” claims and were necessary for
the development and operation of “X’s” mining properties.
a) Is the by-law provision valid? Why or why not?
b) What happens if director “A” is able to consummate his mining claims over
and above that of the corporation’s claims?

28. The Board of Directors of X Corporation through a resolution decided to create

an executive committee and to delegate all its powers to the said committee.
There is no provision in the Articles of Incorporation and By-Laws conferring such
power. Is the creation of the Executive Committee valid? Reason.
29. The primary purpose of Corporation A is to carry mineral exploration and
exploitation. Can it engage in manning or crewing business if the same is not
stated as a secondary purpose? Explain.

30. C Corporation sold its assets to W, Inc. after complying with the requirements of
the Bulk Sales Law. Subsequently, one of the creditors of C Corporation tried to
collect the amount due and they found out that C Corporation had no more
assets left. The creditors then sued W, Inc. on the theory that the latter is a mere
alter ego of C Corporation. Will the suit prosper?

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31. One of the stockholders of VM Corporation is OP Corporation. VM Corporation
has been advancing money to OP Corporation to settle the latter’s
commitments. OP Corporation is not offering its VM Corporation shares to VM
Corporation to pay its advances. Can VM Corporation acquire its own shares
which are not in the names of OP Corporation by way of dacion en pago despite
the presence of negative retained earnings in its books? Reason.

32. For the past 3 years of its commercial operation, “X” an oil company, has been
earning tremendously in excess of 100% of the corporation’s paid-in capital. All
of the stockholders have been claiming that they share in the profits of the
corporation by way of dividends but he Board of Directors failed to lift its fingers.
a) Is Corporation “X” guilty of violating a law? If in the affirmative, state the basis.
b) Are there instances when a corporation shall not be held liable for not
declaring dividends?

33. Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation,

which has a par value of P5 per share. He paid P250,000 and promised to pay the
balance before December 31, 2008. JP Development Corporation declared a cash
dividend on October 15, 2008, payable on December 1, 2008. For how many
shares is Ace Cruz entitled to be paid cash dividends. Explain.

34. The Board of Directors of C Corporation, engaged in the manufacture of food

products, acting on a standing authority of the stockholders to amend the By-
Laws, amended the By-Laws so as to disqualify any stockholder, who is also a
stockholder and director of a competitor, from being elected to its Board of
Directors. S, a stockholder holding sufficient shares to assure him a seat in the
Board filed a petition with the Securities and Exchange Commission for the
declaration of nullity of the amended By-Laws and the cancellation of the
Certificate of Filing of amended B-Laws. He alleged, among others, that as
stockholder, he had acquired the rights inherent in the stock ownership such as
the right to vote and be voted in the election of directors. Reason upon the
merits of the stockholders’ petition.

35. Define “By-Laws”. What are the 2 ways to amend by-laws?

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36. What is proxy? What are the legal limitations of proxy?

37. Triple A Corporation was incorporated in 1960, with 500 founders shares and 78
common shares as its initial capital stock subscription. However, Triple A Corp
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.

38. A distressed company executed a voting trust agreement for a period of 3 years
over 60% of the outstanding paid -up capital shares in favor of a bank to whom it
was indebted, with the Bank named as trustee. Additionally, the Company
mortgaged some properties to the Bank. Because of the insolvency of the
Company, the Bank foreclosed the mortgaged properties, and as the highest
bidder, acquired said properties of the Company. The 3-year period prescribed in
the Voting Trust Agreement having expired, the Company demanded the
turnover and transfer of all its assets and properties, including the management
and operations of the Company. Does the demand of the Company tally with the
concept of a Voting Trust Agreement? Briefly explain your answer.

39. What are the “primary rules of attribution”? Briefly explain.

40. In a complaint for damages, Zebra Corporation alleged that its President, Anton
Molina, suffered mental anguish, social humiliation and serious anxiety as a result
of the tortious acts of Omega Corporation. In its answer with counterclaim,
Omega Corporation alleged that it suffered besmirched reputation because of
the unfounded suit of Zebra Corporation and accordingly claimed for the award
of moral damages. May either corporation recover moral damages based on its
allegations in the complaint. Discuss.

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