Corporation Law

Review Questions
x----------------------/

1. W Medical, Inc. operated a full-service hospital named WMed. Using its stockholders’
advances and a mortgage loan from Bank X, W Medical, Inc. commenced the construction
of a new 11-storey WMed Annex Building. Unfortunately, due to financial constraints, only
seven (7) floors were constructed and the WMed Annex Building remained unfinished.
Despite the non-completion of the WMed Annex Building, W Medical, Inc. continued its
operations and earned modest revenues. While W Medical, Inc.’s assets are more than its
liabilities and it is able to turn a monthly profit, it could not pay its loan installments to
Bank X as they fall due.
a. What is the concept of “insolvency” under the Financial Rehabilitation and Insolvency
Act (FRIA)?
Answer: Insolvency may either be:
Technical - the debtor has more assets than liabilities but foresees the impossibility of
paying debts as they fall due.
Actual - the debtor has more liabilities than assets.
b. May W Medical, Inc. be considered “insolvent” under the FRIA? Explain.
Answer:
insolvent shall refer to the financial condition of a debtor that is generally unable to pay
its or his liabilities as they fall due in the ordinary course of business or has liabilities
that are greater than its or his assets. Thus, W Medical, Inc. may be considered insolvent
because it has more assets than liabilities but is unable to pay its debts or meet its
obligations as they fall due.

2. A foreign company has been exporting goods to a Philippine company for several years
now. When the Philippine company failed to pay the latest exportation, the foreign
company sued to collect in the Philippines. The Philippine company interposed the defense
that the foreign company was doing business in the Philippines without a license; hence,
could not sue before a Philippine court. Is this defense tenable? Explain your answer.
Answer:
The defense is not tenable. The mere act of exporting from one’s own country, without
doing any specific commercial act within the territory of the importing country can not be
deemed as doing business in the importing country. Thus, the foreign company may sue in
the Philippines despite lack of license to do business in the Philippines. ( B. Van Zuiden
Bros Ltd. Vs GTVL Manufacturing Industries 523 SCRA 233

3. Bam filed an action to enjoin SN Company’s Board of Directors from selling a parcel of
land registered in the corporation’s name, to compel the corporation to recognize Bam 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
1|Page
 motion and reasoned that only an action for liquidation of assets can be maintained when
a corporation has been dissolved and Bam cannot seek reliefs which in effect lead to the
continuation of the corporation’s business. The court also ruled that it lost jurisdiction over
the intra-corporate controversy upon the dissolution of the corporation.
a) Was the court correct?
Answer:
The court is not correct. An action to be recognized as a stockholder and 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 intracorporate dispute despite the subsequent dissolution
of the corporation. Aguirre vs FQB +7, Inc. GR no. 170770, January 9, 2013
b) Four years later, SN Company files an action against Bam to recover corporate assets
allegedly held by the latter for liquidation. Will this action prosper?
Answer:
The action cannot prosper because the corporation has no more legal capacity to sue after
three years from its dissolution. Alabang Development Corporation vs Alabang Hills
Village Association, GR no. 187456, June 2, 2014
4. Securities issued by the Philippine government are “exempt securities” and, therefore, need
not be registered with the Securities and Exchange Commission prior to their sale or
offering to the public in the Philippines. What is the rationale behind this exemption?
Answer:
The rationale for the exemption is that the public is amply protected even without the
registration of the securities to be issued by the government since the government is
presumed to be always solvent.
5. Why is the Securities Regulation Code called a “truth in securities law”?
Answer:
The Securities Regulation Code is called a “ truth in securities law “ because it requires the
issuer to make full and fair disclosure of information about securities being sold or offered
to be sold within the Philippines and penalizes manipulative and fraudulent acts, devices
and schemes.
6. Why is the Bangko Sentral ng Pilipinas considered a lender of last resort?
Answer:
It is considered the lender of last resort because it lends to banks and similar institutions
under financial distress when they have no other means to raise funds.

7. Two corporations agree to merge. They then executed an agreement specifying the
surviving corporation and the absorbed corporation. Under the agreement of merger, the
surviving corporation acquired all the rights, properties and liabilities of the absorbed
corporation.
2|Page
 a. What would happen to the absorbed corporation? Must the absorbed corporation
undertake dissolution and winding up procedures? Explain your answer.
b. Pending approval of the merger by the SEC, may the surviving corporation already
institute suits to collect all receivables due to the absorbed corporation from its
customers? Explain.

8. Santorini Corporation (Santorini) was in dire straits. In order to firm up its financial
standing, it agreed to entertain the merger and takeover offer of Proficient Corporation
(Proficient), the leading company in their line of business. Erica, the major stockholder of
Santorini, strongly opposed the merger and takeover. The matter of the merger and
takeover by Proficient was included in the agenda of the next meeting of Santorini's Board
of Directors. However, owing to Erica's serious illness that required her to seek urgent
medical treatment and care in Singapore, she failed to attend the meeting and as
consequently unable to cast her vote. The Board of Directors approved the merger and
takeover. At the time of the meeting, Santorini had been in the red for a number of years
owing to its recurring business losses and reverses. Erica seeks your legal advice regarding
her right as a stockholder opposed to the corporate action. Explain your answer.

9. ABC Corp. is engaged in the pawnshop business involving cellphones, laptops and other
gadgets of value. In order to expand its business and attract investors, it offered to any
person who invests at least P100,000.00 a "Promissory Note" where it obligated itself to
pay the holder a 50% return on investment within one month. Due to the attractive offer,
many individuals invested in the company but not one of them was able to realize any profit
after one month. Has ABC Corp. violated any law with its scheme? Explain.

10. Why is the Securities Regulation Code called a “truth in securities law”?

11. Andante Realty, a marketing company that promotes and facilitates sale of real property
through leverage marketing, solicits investors who are required to be a Business Center
Owner (BCO) by paying an enrollment fee of $250. The BCO is then entitled to recruit
two other investors who pay $250 each. The BCO receives $90 from the $250 paid by each
of his recruits and is credited a certain amount for payments made by investors through the
initial efforts of his Business Center. Once the accumulated amount reaches $5,000, the
same is used as down payment for the real property chosen by BCO. Does the multi-level
marketing scheme constitute an “investment contract” under the Securities Regulations
Code? Define an “investment contract”.

12. Securities issued by the Philippine government are “exempt securities” and, therefore, need
not be registered with the Securities and Exchange Commission prior to their sale or
offering to the public in the Philippines. What is the rationale behind this exemption?

13. Which of the following is/are applicable to a “street certificate”

a. A stock certificate endorsed in blank by the owner;
b. Upon its face, the holder is entitled to demand its transfer into his name from the
issuing corporation;
3|Page
 c. The transferee is justified in believing that it belongs to the holder and transferor;
d. It is a negotiable instrument;
e. Where stock certificates endorsed in blank were stolen from the possession of the
beneficial owners, the transfer is nevertheless valid because instruments endorsed in
blank are bearer instrument.
14. True or False.
The “book of minutes” would be the main reference book in ascertaining a person’s
entitlement to the rights of a stockholder.
If your answer is False, explain your answer.
15. Which of the following statements is/are TRUE:
a. Shares of stock are tangible personal property.
b. Transfer of shares shall not be valid, except as between the parties, until the transfer
is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate/s, and the number
of shares transferred.
c. No shares of stock against which the corporation hold any unpaid claim shall be
transferrable in the books of the corporation.
d. Deed of assignment is a legal means by which shares of stocks can be transferred
from one person to another.
16. Which of the following is/are INCORRECT:
a. The date of delinquency sale of delinquent stocks shall be conducted not be less than
30 days nor more than 60 days from the maturity date of the subscription.
b. The winning bidder is such bidder who shall: (1) offer to pay the full amount of the
balance on the subscription together with accrued interest, costs of advertisement,
and expenses of sale; (2) for the highest number of share or a fraction of a share.
c. The winning bidder would then be entitled to the issuance of stock certificates
corresponding to the shares that is covered by his or her bid.
d. A delinquent shareholder loses the right to receive dividends.
17. “Securities” issued to the public are required by law to be registered with—
a. The Banko Sentral ng Pilipinas;
b. The Philippine Stock Exchange;
c. The Securities and Exchange Commission;
d. The Securities and Exchange Commission and the Philippine Stock Exchange.

18. What is “watered stock” and what is the legal consequence of the issuance of such stock?

19. X is a minority stockholder of CCC Corporation. Y is a member of the Board of Directors

of CCC Corporation and at the same time he is the President. X believes that Y is
mismanaging CCC Corporation hence, as a stockholder and in behalf of the other
stockholders, he wanted to sue Y. which statement is most accurate?
a. X can institute a derivative suit in behalf of himself as a stockholder;
b. A derivative suit must be instituted in behalf of the corporation;
c. Derivative suit is an exclusive remedy that X can institute;
d. Derivative suit is not the remedy in this situation

4|Page
20. Gawsengsit Corp. is a corporation incorporated in Singapore. It invested in Bumblebee
Corp., a Philippine corporation, by acquiring 30% of its shares. As a result, Gawsengsit
Corp. nominated 30% of the directors of the Bumblebee Corp., all of whom are
Singaporeans and officers of Gawsensit Corp. Choose the correct statement relating to
Gawsengsit Corp.
a. Gawsengsit Corp. is doing business in the Philippines and requires a license from the
SEC;
b. Gawsengsit Corp. is not doing business in the Philippines by its mere investment in
a Philippine corporation and does not need a license from the SEC;
c. Gawsengsit Corp. has to appoint a resident agent in the Philippines;
d. Gawsengsit Corp. cannot elect directors in Bumblebee Corp.;

21. A foreign company has been exporting goods to a Philippine company for several years
now. When the Philippine company failed to pay the latest exportation, the foreign
company sued to collect in the Philippines. The Philippine company interposed the defense
that the foreign company was doing business in the Philippines without a license; hence,
could not sue before a Philippine court. Is this defense tenable? Explain your answer.
22. C Corp. is the direct holder of 10% of the shareholdings in U Corp., a non-listed (not
public) firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed
company. The other principal stockholder in H Corp. is C Corp. which owns 18% of its
shares. Meanwhile, the majority stocks in U Corp. are owned by B Corp. and V Corp. at
22% and 30%, respectively. B Corp. and V Corp. later sold their respective shares in U
Corp. to C Corp., thereby resulting in the increase of C Corp.'s interest in U Corp., whether
direct or indirect, to more than 50%.
[a] Explain the Tender Offer Rule under the Securities Regulation Code.
[b] Does the Tender Offer Rule apply in this case where there has been an indirect
acquisition of the shareholdings in H Corp. by C Corp.? Discuss.

23. The purpose of the “Tender Offer” Rule is to—

a. Ensure an even playing field for all shareholders of a company in term of opportunity
to sell their shareholdings;
b. Ensure that minority shareholders in a publicly listed company are protected in the
sense that they will equally have the same opportunity as the majority shareholders in
terms selling their shares;
c. Ensure that the shareholders who would also want to sell their shareholdings will
have the opportunity for a better price;
d. All of the above.

24. The main feature of the Foreign Investment Act of 1991 is to introduce the concept of
“Negative Lists”. Under the said law, what is a “Negative List”?
a. It is a list of business activities or enterprises in the Philippines that foreigners are
disqualified to engage in;

5|Page
 b. It is a list of business activities or enterprises in the Philippines that foreigners are
qualified to engage in;
c. It is a list of business activities or enterprises that are open to foreign investments
provided it is with the approval of the Board of Investment.
d. It is a list of business activities or enterprises that are open to foreign investments
provided it is with the approval of the SEC.

25. Wyatt, an Internet entrepreneur, engaged in a sideline business of creating computer

programs for selected clients on a per project basis and for servicing basic computer
problems of his friends and family members. His main job was being an IT consultant at
Futures Co., a local computer company. Because of his ill-advised investments in the stock
market and the fraud perpetrated against him by his trusted confidante, Wyatt was already
drowning in debt, that is, he had far more liabilities than his entire assets. What legal
recourse remained available to Wyatt? Explain your answer.
26. Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a petition for
voluntary rehabilitation must be approved by:
a. A majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding capital stock.
b. A majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least 2/3 of the outstanding capital stock.
c. 2/3 vote of the Board of Directors and authorized by the vote of the stockholders
representing at least a majority of the outstanding capital stock.
d. 2/3 vote of the Board of Directors and authorized by the vote of the stockholders
representing at least 2/3 of the outstanding capital stock.

27. Which of the following is/are TRUE in a non-stock corporation?

a. No part of its income is distributable as dividends to its stockholders, directors or
officers.
b. Membership in a non-stock corporation and all rights arising therefrom are personal
and nontransferable, unless the articles of incorporation or the bylaws otherwise
provide.
c. Trustees may hold office for not more than 3 years until their successors are elected
and qualified.
d. Trustees may or may not be more than 15.

28. X, Y, and Z executed a joint venture agreement to form a close corporation under the
RCCP, the outstanding capital of which the three of them would equally own. They also
provided therein that any corporate act would need the vote of 70% of the outstanding
capital stock. The terms of the agreement were accordingly implemented and the
corresponding close corporation was incorporated. After 3 years, X, Y and Z could not
agree on the business in which to invest the funds of the corporation. X wants the deadlock
broken. What are the remedies available to X under the RCCP to break the deadlock?
Explain.

6|Page
29. Which of the following apply to a close corporation?
a. There is a limit on the number of stockholders to a maximum of 15.
b. There is a restriction on the transfer of shares.
c. Public offering of shares is prohibited.
d. The BOD is empowered to appoint a provisional director.

30. Distinguish between dissolution and liquidation.

31. The subscription contract covers 1,000 shares @P100 par value/share. Subscriber “X”
made a partial payment of P50,000. The subscription became delinquent. Consequently, an
auction sale of the delinquent stocks/subscription is held. The cost of sale and expenses for
advertisement amounts to P500; interest on unpaid subscription amounts to P1,000. The
following are the bidders and their corresponding bid:
Bidders Bid
A P50,000 for 300 shares
B P50,500 for 500 shares
C P51,500 for 500 shares
D P51,500 for 400 shares
Questions:
a. Who is the winning bidder? Why?
b. Taking into account your answer to Question “a”, how many shares is subscriber
“X” entitled to own? Why?
32. WHAT IS THE PROBATIVE VALUE OF THE STOCK AND TRANSFER BOOK?
The entries are considered prima facie evidence of the matters stated therein and may be
subject to proof to the contrary. (G.R. No. 123553)

33. DOES AN “ISOLATED TRANSACTION” BY A FOREIGN CORPORATION

QUALIFY AS“DOING BUSINESS” IN THE PHILIPPINES?
SUGGESTED ANSWER:
No. Foreign corporations, even unlicensed ones can sue or be sued on a transaction or series
of transactions set apart from their common business in the sense that there is no intention
to engage in a progressive pursuit of the purpose and object of business transaction.
34.

7|Page