Corporation Law Bar Exam Q&A Guarino, Princess Kimberly T. Atty.

Duano BQ 61 Q: Suppose that X Corporation has already issued the 1000 originally authorized shares of the corporation so that its BOD and stockholders wish to increase Xs authorized capital stock. After complying with the requirements of the law on increase of capital stock, X issued an additional 1000 shares of the same value. a) Assume that the stockholder A presently holds 200 out of the 1000 original shares. Would A have a pre-emptive right to 200 of the new issue of 1000 shares? Why? (3%) b) When should stockholder A exercise the pre-emptive right? (2%) A: a) Yes, A would have a pre-emptive right to 200 of the new issue of 1000 shares. A is a stockholder of record holding 200 shares in X Corpo. According to the Corp Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation. b) Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-Laws. When the Articles of Incorporation and the By-Laws are silent, the BOD may fix a reasonable time within which the stockholders may exercise the right. BQ 62-64 Q: ABC Corporation has an authorized capital stock of P1M divided into 50,000

common shares and 50,000 preferred shares. At its inception, the Corporation offered for subscription all the common shares. However, only 40,000 shares were subscribed. Recently, the directors thought of raising additional capital and decided to offer to the public all the authorized shares of the Corporation at their market value. a) Would Mr. X, a stockholder holding 4,000 shares, have pre-emptive rights to the remaining 10,000 shares? (2%) b) Would Mr. X have pre-emptive rights to the 50,000 preferred shares? (2%) c) Assuming that the existing stockholders are entitled to pre-emptive rights, at what price will the shares be offered? (2%)
A: SUGGESTED ANSWER a. Yes. Mr. X, a stockholder holding 4,000 shares, has pre-emptive right to the remaining 10,000 shares. All stockholders of a stock corporation shall enjoy preemptive right to

subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. ALTERNATIVE ANSWER. a. No, Mr X does not have pre-emptive right over the remaining 10,000 shares because these shares have already been offered at incorporation and he chose not to subscribe to them. He, therefore, has waived his right thereto and the corporation may offer them to anyone. SUGGESTED ANSWER: b. Yes. Mr. X would have pre-emptive rights to the 50,000 preferred shares. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. ALTERNATIVE ANSWER: b. Yes, Mr. X has preemptive right over the 50,000 preferred shares because they were not offered before by the corporation for subscription. SUGGESTED ANSWER: c. The shares will be offered to existing stockholders, who are entitled to preemptive right, at a price fixed by the BOD, which shall not be less than the par value of such shares. BQ 65 Q: Divine Corporation is engaged in the manufacture of garments for export. In the course of its business, it was able to obtain loans from individuals and financing institutions. However, due to the drop in the demand for garments in the international market, Divine Corporation could not meet its obligations. It decided to sell all its equipment such as sewing machines, perma-press machines, high speed sewers, cutting tables, ironing tables, etc., as well as its supplies and materials to Top Grade Fashion Corporation, its competitor. 1) How would you classify the transaction? 2) Can Divine Corporation sell the aforesaid items to its competitor, Top Grade Fashion Corporation? What are the requirements to validly sell the items? Explain. A: 1) The transactions would constitute a sale of "substantially all of the assets of Divine Corporation complying with the test under Sec. 40 of the Corporation Code, the transactions not being "in the ordinary course of business," and one "thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated."

2) For such a transaction to be valid, it requires not only the favorable resolution of the Board of Directors of Divine Corporation, but also the ratificatory vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock, as mandated under Sec. 40 of the Corporation Code. The sale would be void in case of failure to meet the twin approvals. (Islamic Directorate of the Philippines v. Court of Appeals, G.R. No. 117897, May 14, 1997 BQ 66 Q: Arnold has in his name 1,000 shares of the capital stock of ABC Co as evidenced by a stock certificate. Arnold delivered the stock certificate to Steven who now claims to be the real owner of the shares, having paid for Arnolds subscription. ABC refused to recognize and register Stevens ownership. Is the refusal justified? Explain. A: ABCs refusal to recognize and register Stevens ownership is justified. The facts indicate that the stock certificate for the 1,000 shares in question is in the name of Arnold. Although the certificate was delivered by Arnold to Steven, the facts do not indicate that the certificate was duly endorsed by Arnold at the time it was delivered to Steven or that the procedure for the effective transfer of shares of stock set out in the by-laws of ABC Co, if any, was observed. Since the certificate was not endorsed in favor of Steven (or anybody else for that matter), the only conclusion could be no other than that the shares in question still belong to Arnold. (Razon v IAC GR 74306 Mar 16,92 207s234) BQ 67 Q: Under what conditions may a stock corporation acquire its own shares? (2%) A: In line with the trust fund doctrine that generally renders it unlawful for the corporation to return assets to the stockholders representing capital, a corporation may acquire its own shares only when there exists in the books unrestricted retained earnings to cover the repurchase of shares. The purpose of the repurchase of shares must be a legitimate business purpose of the corporation, such as to: 1) ELIMINATE fractional shares arising out of stock dividends; 2) COLLECT or COMPROMISE an indebtedness to the corporation arising out of unpaid subscription in a delinquency sale; 3) to PURCHASE delinquent shares sold during the sale; and 4) to PAY dissenting or withdrawing stockholders entitled to such payment under the Corporation Code. (Sees. 41 and 82, Corporation Code) BQ 68 - 69 Q: A Corporation executed a promissory note binding itself to pay its President/Director, who had tendered his resignation, a certain sum in payment of the latters shares and interests in the company. The corporation defaulted in paying

the full amount so that said former President filed suit for collection of the balance before the SEC. a) Under what conditions is a stock corporation empowered to acquire its own shares? b) Is the arrangement between the corporation and its President covered by the trust fund doctrine? Explain your answers briefly. A: SUGGESTED ANSWER: a) A stock corporation may only acquire its own shares of stock if the trust fund doctrine is not impaired. This is to say, for instance, that it may purchase its own shares of stock by utilizing merely its surplus profits over and above the subscribed capital of the corporation. ALTERNATIVE ANSWER: a) (an answer enumerating the instances or cases under the Corporation Code where the Corp allows the acquisition of shares such as in the stockholders exercise of appraisal right, failure of bids in the sale of delinquent shares, etc.) SUGGESTED ANSWER: b) The arrangement between the corporation and its President to the extent that it calls for the payment of the latters shares is covered by the trust fund doctrine. The only exceptions from the trust fund doctrine are the redemption of redeemable shares and, in the case of close corporation, when there should be a deadlock and the SEC orders the payment of the appraised value of a stockholders share. BQ 70 Q: On December 6, 1988, A, an incorporator and the General Manager of the Paje Multi Farms Co, resigned as GM and sold to the corporation his shares of stocks in the corporation for P300th, the book value thereof, payable as follows: a) P100th as down payment; b) P100th on or before 31 July1989; and c) the remaining balance of P100th on or before 30 Sep 1989. A promissory note, with an acceleration clause, was executed by the corporation for the unpaid balance. The corporation failed to pay the first installment on due date. A then sued Paje on the promissory note in the RTC. a) Does the court have jurisdiction over the case? A: The RTC has jurisdiction over the case. The SC said that a corporation may only buy its own shares of stock if it has enough surplus profits therefore. BQ 71 Q: When may a corporation invest its funds in another corporation or business or for any other purposes? A:

A corporation may invest its funds in another corporation or business or for any other purpose other than the primary purpose for which it was organized when the said investment is approved by a majority of the BOD and such approval is ratified by the stockholders representing at least 2/3 of the outstanding capital stock. Written notice of the proposed investment and the date, time and place of the stockholders meeting at which such proposal will be taken up must be sent to each stockholder. (Sec 42 Corp Code) BQ 72 Q: Stikki Cement Co was organized primarily for cement manufacturing. Anticipating substantial profits, its President proposed that Stikki invest in a) a power plant project, b) a concrete road project, and c) quarry operations for limestone in the manufacture of cement. 1) What corporate approvals or votes are needed for the proposed investments? Explain. 2) Describe the procedure in securing these approvals. A: SUGGESTED ANSWER: 1. Unless the power plant and the concrete road project are reasonable necessary to the manufacture of cement by Stikki (and they do not appear to be so), then the approval of said projects by a majority of the BOD and the ratification of such approval by the stockholders representing at least 2/3 of the outstanding capital stock would be necessary. As for the quarry operations for limestone, the same is an indispensable ingredient in the manufacture of cement and may, therefore, be considered reasonably necessary to accomplish the primary purpose of Stikki. In such case, only the approval of the BOD would be necessary (Sec 42 BP 68) ALTERNATIVE ANSWER: 1. The majority vote of the BOD is necessary. The investment in a) a power plant project, b) a concrete road project, and c) quarry operations of limestone used in the manufacture of cement, is within the express or implied power of the corporation, or at least the same is incidental to, or necessary for the existence of the corporation. SUGGESTED ANSWER: 2.a) The procedure in securing the approval of the BOD is as follows: a notice of the BOD should be sent to all the directors. The notice should state the purpose of the meeting. At the meeting, each of the project should be approved by a majority of the BOD (not merely a majority of those present at the meeting)

2.b) The procedure in securing the approval of the stockholders is as follows: Written notice of the proposed investment and the time and place of the stockholders meeting should be sent to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. At the meeting, each of the projects should be approved by the stockholders representing at least 2/3 of the outstanding capital stock. (Sec 42 BP 68)